The Concept of Return on Equity (ROE)
Return on equity (ROE) refers to the fraction of net income over equity and return on assets (ROA) refers to the fraction of net income over average assets. ROA, therefore, indicates that a public health organization is comparing its earning advantages to its base of assets. The latter method works best if the public health organization chosen is a small one as they can monitor how their performance is faring from time to time. On the other hand, ROE shows how well a company is using its capital or base equity and consequently works well for bigger organizations. ROE is quite advantageous because even if an organization does not have assets, it can still analyze its progress. On the other hand, ROA is a bit limiting as some institutions may not possess assets.
To this end, ROE is more important because it allows public organizations to be compared to other organizations as there is a prominent level of flexibility. The other advantage of ROE is that it reflects the owner’s interests through the equity entity. The survival of any public organization is highly associated with its equity as shareholders are usually the last fallback during times of financial turmoil. ROA is a problem when it comes to adjustments for risks as the latter cannot account for unexpected loss which is only included in the capital – an aspect that is mostly covered using ROE. Here, both regulatory and economic forms of capital are included, and this makes it risk-based. ROE, therefore, makes a public health organization more accountable for variations in risks.