Return on Equity is a ratio of Net Profit for some fiscal year let's say 2018 and Total equity at last date of the fiscal year.
But Total Equity is calculated by adding some amount from Net profit(after paying dividends). Isn't it wrong to calculate profit earned on every unit of equity invested this way?
e.g. Profit for fiscal year = x
Total Equity at the end of the fiscal year = Retained Earnings + Some part of x after dividends.
How can we say that ROE is a right way of calculation?