Ratio manipulation by Companies

ROE is ratio of (Profits earned)/(Equity). So manipulating profitability or equity component is how you change ROE.

1. Using more debt instead of putting in equity by promoters. Debt financing is cheaper than equity and also faster. So by this you decrease denominator thus improving ROE ratio.
2. This reduces the number of shares outstanding and thus reduces the denominator in the ROE formula, making ROE appear higher. While it can signal confidence in the company’s future, it doesn’t reflect actual operational improvements.
3. Basically window-dressing! using different accounting practices. For ex, extending the depreciation period for assets reduces depreciation expense, inflating net income and ROE.