ROE classroom worksheet: compare equity bases and shareholder returns

Prepare two report cards for 40 minutes

Allow five minutes for the question measured, ten for equity bases, ten for ratios, ten for share-price cards and five for feedback. Give each pair reports A and B. Amounts cover the same fictional full year and use SEK millions. Both after-tax profits belong to ordinary shareholders; no minority interests or preference shares are present.

Calculate average equity as opening plus closing equity divided by two. This is a stated simplification, not a complete average of every day during the year. Changes within the period can make additional observations relevant. Ask students to label the report card SEK million so it is not later confused with the share cards’ SEK per share.

If the table does not fit, scroll it sideways.

Student worksheet: display the entire denominator

First calculate average equity for each company. Divide each company’s profit by its own equity base and express the result as a percentage. State what makes the comparison possible: period, unit and the owner group to which both profit and equity belong. Leave the calculations visible for another pair to check.

Next assess the claim “Company A gives every shareholder 16.67% this year”. Mark which information the report cards provide and which information is absent. Reported equity is not the price someone pays for a share. A profitability ratio therefore cannot by itself establish that person’s return. Ask students to identify the additional card they would need.

Answers: ROE of 16.67% and 9.09%

A has average equity (100 + 140) / 2 = 120 and ROE 20 / 120 × 100 ≈ 16.67%. B has average equity 220 and ROE approximately 9.09%. The difference exists despite equal profit amounts. It does not alone establish which company is better, cheaper or less risky.

A separate share card starts an A share at SEK 50, ends at 45 and pays a cash dividend of 1. Without reinvestment, fees or tax, return is (45 + 1 − 50) / 50 × 100 = −8%. For B, prices are 20 and 21 with dividend 0.50; return is +7.5%. This is a different measure from ROE.

Teacher notes: assess a conclusion and missing evidence

Ask each pair to write one accurate sentence about ROE and another about the share-card outcome. Profit and equity are company amounts, while price and dividend here are per share. Price cards are separate fictional observations, not figures derived from ROE. The return cases involve no other shareholder payments or changes in share quantity.

Discuss information needed to explain equity changes, such as owner contributions and dividends. Assess whether students request evidence before asserting a cause. With zero average equity the ratio is undefined; a negative base requires careful interpretation. Company search in Investiq does not promise ROE rankings or recommendations from this worksheet. Continue by comparing the two measure definitions in the prerequisite lessons.