The computation of return on equity,or ROE,does not include retained earnings as part of common equity because retained earnings includes all net income for the company since its inception and analysts are trying to calculate the return for just the current year.

Question

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Retained earnings are included in the calculation of common equity when computing Return on Equity (ROE) because ROE measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested, which includes retained earnings as part of the shareholders' equity.

The Computation of Return on Equity,or ROE,does Not Include Retained