The return on equity is defined as the return which is received on the equity of the business. This equity is based on the common stock shareholder’s investment in the business and their ownership interest.The calculation of the return on equity is conducted by taking the net income for a period and dividing it by the shareholders’ equity
It is important for a company to establish an investment based calculation for the return on equity (ROE) and the return on investment (ROI) as they determine the performance of the company in the industry and the markets. The return on equity (ROE) is important for companies specially when they are investing and operating in international markets. The ROE enables the company to determine the growth return it is facing from its operations in the overseas markets.
The ROI on the other hand evaluates the investment of the company in a business, or a new market. The ROI provides the gains the company is faced with after deducting the investment costs, which is an important evaluation tool for the return on the investment made in new projects and operations in the overseas markets.. The formula for the for the ROI pertains to the gains subtracted by the investment costs which are divided by the investment costs to arrive at a percentage based ratio.
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