Definition: Partner return on equity is a financial ratio that measures the return on a partner’s investment. In this case, the partner’s investment is his share of equity or money left in the company at the end of the year.
What Does Partner Return on Equity Mean?
Partner return on equity is calculated by dividing a partner’s net income from the partnership by the average partner equity. The average partner equity is usually calculated by adding the beginning and ending equity accounts together and dividing by two.
The partner return on equity calculation is important for partners to evaluate whether their investment in the partnership is worth keeping their money in. In other words, are they receiving a good enough return or should they invest their money elsewhere.
Let’s take Bob for example. Bob owns 50% of Bob’s Roofing, LLC, a family owned construction company. Bob’s equity at the beginning of the year was $100 and the partnership had net income of $150 for the year. Since Bob is a 50% partner, he is entitled to half of the partnership income, so Bob’s ending equity balance would be $175. The average equity for the year would be $87.50. Here is the PRE calculation.
Bob sees a return of $.85. This means that every dollar that Bob leaves in the business, he receives 85 cents back on his investment. This is a very good return and Bob is better off keeping his money in the business then trying to invest it somewhere else.