Return on Equity

While calculating ROE do we take denominator as opening shareholders fund or closing shareholders fund or their average.
The question says :
Earnings during the year 195
No dividends distributed
Balance sheet totals:
2020
Assets-1580
Liabilities - 600
Paid up capital - 745
Retained earnings - 235

2021
Assets-1920
Liabilities - 745
Paid up capital - 745
Retained earnings - 430
Replies (5)
Quick Summary
This discussion clarifies how to calculate Return on Equity (ROE), specifically addressing whether to use opening or closing shareholder funds in the denominator. The consensus is that if equity has remained stable, the opening balance is appropriate. However, if equity has changed due to share buybacks or new issues, using the average balance is recommended for a more accurate reflection of performance throughout the year.

Ratio analysis is done annually based on annual results. Most of the ratios are for the current year

I hope you got the rest. All the best.

Can u please tell the denominator figurr
You can use both the formula depending on situation
Situations
1. Equity component has remained same during the year. Only change is due to profit and loss
2. Equity component has changed during the year say for eg. due to buyback or fresh issue or right issue

In (1) you should take Opening balance
In (2) you should take Average balance to reflect the change in capital during the year

Coming to your question, observe that ESC in both year is same = 745. Hence we can say that your question falls under situation (1). Therefore my take is that you should take opening balance and not average

What I told you is also there in CFA syllabus.

Hope you understood 😃

Sorry, the picture is not visible.

always calculate closing balances for every formula

if your question suggests a change, then additional capital needs to be calculated

opening equity

+retained earning

-Dividend paid

= closing equity

This question is showing all closing balances eg retained earnings= 195+235=430. No dividends paid.

denominator= 735+430

Is this CA or b.com question?

CA and thankyou

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