The statement: The return on equity (ROE) is irrelevant for not-for-profit organizations.

The statement: The return on equity (ROE) is irrelevant for not-for-profit organizations.

• A. True
• B. False
• C. Not applicable
• D. Depends

Answer: (B)

ROE compares profits to owners’ equity, but not-for-profit organizations don’t have owners or equity in that sense. They have net assets instead, and the typical ROE ratio isn’t a meaningful measure on its own. That said, a closely related idea is still useful: return on net assets. This adapts the concept to the not-for-profit world by looking at how much net assets grow (or how much surplus is generated) relative to the net assets available. A higher return on net assets indicates the organization is using its resources efficiently to increase its capacity to fund programs and future work. So, while the exact ROE ratio isn’t applicable, interpreting ROE-like performance through net assets provides valuable governance and planning insight, which is why the statement is not entirely accurate.

ROE compares profits to owners’ equity, but not-for-profit organizations don’t have owners or equity in that sense. They have net assets instead, and the typical ROE ratio isn’t a meaningful measure on its own. That said, a closely related idea is still useful: return on net assets. This adapts the concept to the not-for-profit world by looking at how much net assets grow (or how much surplus is generated) relative to the net assets available. A higher return on net assets indicates the organization is using its resources efficiently to increase its capacity to fund programs and future work. So, while the exact ROE ratio isn’t applicable, interpreting ROE-like performance through net assets provides valuable governance and planning insight, which is why the statement is not entirely accurate.