Return ratios look at the return made by investors. Now, this may be small groups, such as just equity holders, or it could include all investors, which may include other suppliers of finance such as debt providers or preference shareholders. Here we look at return on equity. And what is it? Well, it's the ability of a firm to generate profits from its shareholders' investments. So if I as a shareholder invested 100 and I got a return of five, that would be a 5% return on equity. So ROE is a percentage ratio.

How is it calculated? Well, you take your net income, and that's the return that's available to be paid out to shareholders, and you divide it by the shareholders' equity, which we have to think about as the amount that shareholders invested. Why is it important? Well, it's a measure of profits. It looks at what could be paid out to the equity holders in return for their investments so they care about it. It's also from the shareholders' perspective. They've put their money at risk. They own the company. They want to know how well the company is doing at turning their equity investments into profits. And lastly, it aids comparison. So as a shareholder, I might be invested in this company but also lots of others as well. So if I can calculate the ROE for each of these companies, I can compare my investment performance over the various companies.