Which of the following statements is true about return on equity (ROE)?
A) It measures the return on common stockholders' investment in the assets of the firm.
B) The value of the firm's ROE is affected by net income.
C) The value of the firm's ROE is affected by the amount of financial leverage or debt that the firm uses.
D) All of these choices are correct.

Question

Quizplus · Accepted Answer

ROE measures the profitability of a corporation in relation to stockholders' equity, thus it reflects the return on the money shareholders have invested. It is directly influenced by the net income, as it is a measure of how effectively a company uses investments to generate earnings growth. Additionally, ROE is affected by the level of financial leverage or debt a company uses, since leverage can amplify the returns generated on equity but also increases the risk.

Which of the Following Statements Is True About Return on Equity