Authors: Mohamed Ihab Kira
Addresses: Department of Financial Management and Accounting, College of Management & Technology, Arab Academy for Science, Technology & Maritime Transport (Dokki Branch), 23 Dr. El-Sobky St., Dokki, Giza, Egypt
Abstract: Return on Equity (ROE) is usually characterised as the most important profitability ratio from the perspective of equity investors. This paper develops a concise method for analysing how this ratio is affected by changes in various economic variables such as price, quantity, cost and interest on debt. The differential impact of changes in those variables can be elucidated. The paper also explores the relationship between changes in ROE and changes in leverage. The analytical framework is very helpful for entrepreneurs and financial managers in analysing potential projects. Numerical illustrations are provided.
Keywords: return on equity; ROE; profitability; scenario analysis; economic variations; degree of leverage; economic variables; price; quantity; cost; interest on debt.
International Journal of Managerial and Financial Accounting, 2014 Vol.6 No.2, pp.146 - 155
Received: 10 Dec 2013
Accepted: 22 Jul 2014
Published online: 29 Aug 2014 *