Relationship between Return on Total Funds and Return on Equity
How are Return on Total Funds and Return on Equity related?
Total Funds consist of Equity, Preferred Stock and Debt (both long- and short- term). In other words it's all the funds invested in the business except non-interest bearing liabilities (e.g. accounts payable, deferred taxes, provisions).
Below is graphical visualization of how much of return on equity is actually earned straight from 'business' and how much from 'funding structure'. In other words, it shows the composition of return on equity in terms of 'organic' return from the business and impact of financial leverage, both debt or preferred capital.
The ratios, analyses pertaining to Return on Total Funds, Return on Equity and its constituents represented in the below chart are based on information drawn from financials (e.g. financial statements comprising balance sheet, income statement or profit & loss account) of listed companies across the globe.