Brief Definition
Return on Equity (ROE) is a measure of how well a company generates profits in relation to the money invested by its shareholders. It shows the percentage of net income that the company earns for each dollar of shareholders’ equity.
To calculate ROE, divide the company’s net income by the shareholders’ equity and multiply by 100. A higher ROE indicates that the company is more efficient in using its shareholders’ investment to generate profits.
ROE is commonly used by investors to evaluate a company’s profitability and compare it with similar companies in the industry. However, it’s important to consider other financial factors and industry benchmarks when assessing a company’s overall financial health.
Further Explanation
Return on Equity (ROE) is a financial metric that measures the profitability and efficiency of a company in generating returns for its shareholders. It indicates the percentage of net income generated by a company in relation to the shareholders’ equity, which represents the ownership interest of shareholders in the company.
The formula for calculating Return on Equity is:
ROE = (Net Income / Shareholders’ Equity) x 100
ROE represents how effectively a company utilizes the capital invested by its shareholders to generate profits. A higher ROE indicates that a company is generating more income for each unit of shareholders’ equity, which is generally viewed as favorable.
ROE is commonly used by investors and analysts to assess a company’s financial performance and compare it with industry peers. However, it is important to note that ROE alone does not provide a complete picture of a company’s financial health, and it should be evaluated in conjunction with other financial indicators and industry benchmarks.