In 2016, Turnpoint Inc. had net income of $400,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000. In 2017, Turnpoint Inc. had net income of $700,000, assets of $4,000,000, sales of $1,300,000, and debt of 2,000,000. Did Turnpoint Inc's return on equity improve from 2016 to 2017?
A) No
B) Yes
C) Stayed the same
D) Not enough information to answer

Question

Quizplus · Accepted Answer

Return on Equity (ROE) is calculated as Net Income / Shareholder's Equity. Shareholder's Equity can be derived from Assets minus Debt. For 2016, Equity = $5,000,000 - $2,000,000 = $3,000,000, so ROE = $400,000 / $3,000,000 = 13.33%. For 2017, Equity = $4,000,000 - $2,000,000 = $2,000,000, so ROE = $700,000 / $2,000,000 = 35%. Thus, ROE improved from 2016 to 2017.