Calculating Partner Return on Equity Easy

Partner Return on Equity

Decision Analysis

A1 Compute partner return on equity and use it to evaluate partnership performance. An important role of partnership financial statements is to aid current and potential partners in evaluating partnership success compared with other opportunities. One measure of this success is the partner return on equity Partner net income divided by average partner equity for the period. ratio: This measure is separately computed for each partner. To illustrate, Exhibit 12.4 reports selected data from the Boston Celtics LP. The return on equity for the total partnership is computed as $216/[($85 + $253)/2]=127.8%. However, return on equity is quite different across the partners. For example, the Boston Celtics LP I partner return on equity is computed as $44/[($122 + $166)/2]=30.6%, whereas the Celtics LP partner return on equity is computed as $111/[($270 + $333)/2]=36.8%. Partner return on equity provides each partner an assessment of its return on its equity invested in the partnership. A specific partner often uses this return to decide whether additional investment or withdrawal of resources is best for that partner. Exhibit 12.4 reveals that the year shown produced good returns for all partners (the Boston Celtics LP II return is not computed because its average equity is negative due to an unusual and large distribution in the prior year). EXHIBIT 12.4 Selected Data from Boston Celtics LP * Totals may not add up due to rounding.