Question

Explain the difference between the ROE and ROR for a public company Using this, show how it is possible, from a starting point, for one to go up and the other to go down.

Answer 1

Return on equity (ROE) it is the ratio of net income to average equity. Higher the ROE better for the firm and stock price of the firm. ROE mainly talking about how efficiently management is using the capital to generate revenue.

Rate of return (ROR) this is the minimum rate of return is expected by the shareholders. It used for the calculation of gain and loss on the investment. It is used by the the investor or other share holder so that they can decide whether they should go with the investment or not.

As the ROR is start falling there will be huge incentive to the investor to invest in the company which can lead to higher profit and eventually higher ROE and vice versa. In that way we can say that lower ROR lead to higher ROE and vice versa.