Financial Education - Return on equity and financial profitability of investment funds

The return on equity ratio, or return on equity, is an estimate that measures the return obtained on the shareholders' investment in the company in general; the higher the return, the better it is for the owners.

It allows managers and investors to know the rate of return generated by the invested equity, and enables investors to compare their investment with other available investments.

The financial or equity return corresponds to an interested investment, that of the owners of the company. It tries to measure the profitability they obtain from their investment in the company, whereby, depending on the difference between the profitability of the assets and the cost of the liabilities, it is either positive or negative.

The financial profitability or return on equity may be respectively higher or lower than the economic profitability or return on assets, the more leveraged a company is, the higher its financial profitability will be, because a highly leveraged company builds its assets with a lot of liabilities and little capital.

Since the capital is so small, we will have a higher profit divided by a smaller base, which makes the return on the shareholders' investment higher. This level of liabilities/capital must be evaluated by financiers, because the higher the profitability, the higher the risk.