- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 39. Overview of Equity Securities
- Subject 6. Equity Securities and Company Value

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**CFA Practice Question**

Which of the following formulas is the formula for computing return on equity (ROE)?

B. Net income divided by equity

C. Sales divided by assets

A. Net income divided by assets

B. Net income divided by equity

C. Sales divided by assets

Correct Answer: B

The formula for computing return on equity is net income divided by equity. Return on equity will be greater than return on investment when a company has financial leverage greater than one.

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**User Contributed Comments**
7

User |
Comment |
---|---|

Gina |
NI/A=ROI NI/E=ROE A/E=Fin.Leverage S/A=A Turnover |

julescruis |
thanks gina |

godz |
if you got this wrong dont show up at the exam center |

Drzewes |
GIna: NI/A is ROA ROI = NI/ Equity + total debt I am almost :) sure. |

endlessfin1te |
isn't Asset = Equity + Debt anyway? |

johntan1979 |
ROA = ROI |

yenweic |
But wouldnt ROA < ROE if u make a loss? Hence the explanation is not entirely correct? |