Returns on equity (ROE) represent a relation where income has to be divided by the stakeholders’ equity (average). It means that investors are most likely to gain more insight into stakeholder power and make their decisions based on that particular factor. Another way to represent the relationship between investors and stakeholders is to detract liabilities from the total assets. One of the most rational approaches to investing in a company would be Warren Buffet’s strategy, where an investor would have to investigate the depth of the net income in order to highlight the required expenses. The net income and stakeholders should be interconnected because the business environment does not favor risky decisions and investments that are not going to produce a valuable ROE. There is also a potential risk of investing in a business and not having the opportunity to outweigh a perilous decision with the net income.
Nevertheless, the highest net income does not represent a guarantee of sufficient business effectiveness. This happens because companies tend to fold because of a series of factors and not just one variable, such as employee morale, workforce turnover, or the lack of leadership. The best example to reinforce the statement above is Apple. Despite remaining one of the most prominent companies in the world, it suffers from the inability to make creative decisions and focus on self-supply mechanisms. The high potential for legal issues and little attention paid to employee conditions are the two core conundrums that affect employee morale and damage the supply chain irreversibly. At the end of the day, Apple may have the highest net income, but it does not protect the electronics mogul from a potential tumble caused by misguided investments and their consequences. Apple’s ROE can be calculated by dividing total income by average shareholder equity.