ACCA Applied Knowledge · Financial Accounting · Stakeholders' needs
An investor is deciding whether to buy more shares in Orion Co. Which ratio would be most relevant to the investor's assessment of the return on the shareholders' investment?
Return on equity is most relevant because it shows the profit earned relative to the shareholders' investment. Inventory holding period, current ratio and payables payment period concern working capital and liquidity, which interest suppliers and lenders more than investors assessing returns.
- AReturn on equityCorrect
- BInventory holding period
- CCurrent ratio
- DTrade payables payment period
Explanation
Return on equity (profit attributable to shareholders relative to equity) measures the return earned for shareholders. The other ratios concern working capital and liquidity, which are more relevant to suppliers and lenders.
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