Return on equity ratio?? (1 Viewer)

[ando_88]

hey everyone!

I'm a bit confused with the return on equity ratio. I know that it is net profit/owners equity x 100 however owners equity can be different sometimes.

For example if you are given the following:

Capital 100
Net profit - 40
Drawings - 10

Owners Equity = $130 right?

therefore would return on equity be 40/130 or 40/100 or 40/90??

im a bit confused

thanks!

 

[Tommy_69]

yeah u do take incount the WHOLE of Owners Equity, therefore 40/130

 

[redruM]

OE = capital + net profit - drawings
= 100 + 40 - 10
= 130

if i get that wrong i'd have learnt nothin last year.

owner's equity is the "wealth" of the owner, correct? so what increases/decreases this?
capital- input into business, therefore an increase.
net profit- if you make a profit, you gain wealth, therefore an increase
drawings- short for withdrawals, what happens when you withdraw money from businees, it decreases.

hth

btw, my answer isnt from a business studies background, so ignore if it is sounds too foreign.