Return on Equity and Sales — Practice Questions
Return on Equity (ROE) and Return on Sales (ROS) are two different ways to measure a company’s profitability. ROE is used by outside investors, while ROS is used by the people in the company.
The following practice questions ask you to calculate both ROS and ROE for the same company.
Use the following information to answer the questions.
Here is an excerpt from the annual report of Little Falls Bandages:
Cash dividends paid to common stockholders amounted to $575.
Calculate the ROE or return on common stockholders’ equity.
Calculate profit margin or ROS for 2015.
Answers and explanations
ROE is a measure of a company’s profitability. Analysts look at the trend over time and compare the company’s ratio to the industry average to determine the profitability of the company. ROE is equal to net income divided by common stockholders’ equity. Common stockholders’ equity is equal to the sum of contributed capital and retained earnings if there is no preferred stock.
Profit margin or ROS is a measure of profitability and shows the amount of income resulting from each dollar of sales. You calculate it by dividing net income by net sales.
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