Is the return on equity ratio relevant for not-for-profit organizations?

The return on equity (ROE) ratio is traditionally utilized to assess the profitability of for-profit organizations, measuring how well a company generates profits from shareholders' equity. In the context of not-for-profit organizations, the fundamental objective differs; they do not operate to generate profit or return equity to shareholders. Instead, their focus is on achieving their mission and serving the community or population they work with.

Not-for-profit organizations are typically funded through donations, grants, and service revenue, and they reinvest any surplus back into the organization to further enhance their mission rather than distribute it as profits. Therefore, using the ROE ratio as a measure of performance in this context is largely irrelevant. Instead, other metrics, such as program efficiency and fundraising effectiveness, are more appropriate to evaluate how well a not-for-profit organization is utilizing its resources to fulfill its objectives.

In summary, the relevance of the return on equity ratio is diminished in the not-for-profit sector due to the absence of financial returns to shareholders and the different evaluative criteria that govern their success.