CMA Study Group

Average of equity is considered when we calculate ROE (return on equity). Formula for ROE is = Net income available to common shareholders/Average Total Equity

whereas in Debt to equity the formula is-: Total liabilities/Total equity.

That`s why we don`t average the equity here we take the total equity.

Hi,while calculating a ratio which includes bothe profit and loss and balance sheet figures ( like ROE, net income is a profit and loss item and equity is a balance sheet item) , we have to take the average of balance sheet item.

Whereas ratio calculation which includes only balance sheet item, we have to take the year end Balance.