Ratios: Return on Equity (ROE) definitions Flashcards
Ratios: Return on Equity (ROE) definitions
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Return on Equity Profitability ratio showing how much net income is generated for each dollar of common equity, typically expressed as a percentage. Net Income Amount remaining after all expenses, taxes, and costs are subtracted from total revenue during a specific period. Average Common Equity Mean value of common equity over a period, calculated by adding beginning and ending balances and dividing by two. Common Equity Portion of stockholders' equity attributable to common shareholders, excluding any amounts related to preferred stock. Preferred Stock Class of ownership with priority over common stock for dividends and assets, excluded from common equity calculations. Profitability Ratio Financial metric used to assess a company's ability to generate earnings relative to equity, assets, or other financial elements. Leverage Extent to which a company uses debt compared to equity in its capital structure, influencing both risk and potential returns. Debt Financing Method of raising capital by borrowing funds, increasing financial risk but potentially boosting returns for equity holders. Equity Financing Raising funds by issuing shares of stock, resulting in ownership dilution but no obligation for repayment. Stockholders' Equity Total value of assets remaining after liabilities are subtracted, representing ownership interest in a company. Assets Resources owned by a company, financed through a combination of liabilities and equity. Liabilities Obligations or debts a company must repay, including loans and other forms of borrowed money. Net Loss Situation where total expenses exceed total revenues, resulting in negative income for a period. Percentage Return Expression of a ratio as a percent, indicating the proportion of income earned relative to equity invested. High Risk High Reward Scenario where increased financial leverage can lead to greater returns for equity holders but also amplifies potential losses.