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# What is a company's "ROE" and "IRR" how do you calculate it?

When you measure how much earnings a company generates from its assets, Return on Equity (ROE) is an investor's gauge of that company and its ability to create profit generating efficiencies. Investors can gather information from the ROE that determines if the company being assessed is a profit making entity or a bad investment.

This research explains what ROE and IRR is in-depth and provides analysis to determine how to calculate a company's ROE and IRR with references in APA format.

#### Solution Preview

When you measure how much earnings a company generates from its assets, Return on Equity (ROE) is an investor's gauge of that company and its ability to create profit generating efficiencies (Kuehner-Hebert, 2009). Investors can gather information from the ROE that determines if the company being assessed is a profit making entity or a bad investment.

Typically businesses that see great ROE are capable of squeezing profits out of their operations and they also tend to have a competitive advantage in their industry. These factors typically result in a very favorable relationship between company profit and investor's returns. This is why ROE is such a valuable tool to examine when considering investing.

A common practice used by potential investors is to examine (where plausible) a company's past 5 year average ROEs against other like kind company's in the same industry in search of gaining a competitive advantage (Kuehner-Hebert, 2009).
To calculate a company's ROE you need to divide the net income of that company by the shareholders equity, sometimes referred to as "book value" (Kuehner-Hebert, 2009).

Simply stated the formula to use is Net income / Average common Equity to shareholders. To find Net income you would look at the last 4 quarters of the company's earnings on its income statement. To locate the Shareholder equity portion of the equation you need to look on the balance sheet and get the difference between ...

#### Solution Summary

When you measure how much earnings a company generates from its assets, Return on Equity (ROE) is an investor's gauge of that company and its ability to create profit generating efficiencies. Investors can gather information from the ROE that determines if the company being assessed is a profit making entity or a bad investment.

This research explains what ROE and IRR is in-depth and provides analysis to determine how to calculate a company's ROE and IRR with references in APA format.

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