Brief Definition
Return on Equity (ROE) is a financial ratio that measures a company’s profitability in relation to the equity held by its shareholders. It indicates how effectively the company is using the investors’ funds to generate profits.
Further Explanation
Return on Equity (ROE) is a financial ratio that measures a company’s profitability in relation to the equity held by its shareholders. It indicates how effectively the company is using the investors’ funds to generate profits. A higher ROE suggests that the company is efficient at generating income from new investments.
Example:
If Company B has a net income of $1 million and shareholders’ equity of $5 million, the ROE would be calculated as:
ROE = 1,000,000 / 5,000,000 = 20%
This means that for every dollar of equity, Company B generates 20 cents in profit.