Return on Equity (ROE)

What is Return on Equity (ROE)

Return on equity (ROE) is a financial ratio that measures the profitability of a company's shareholders' equity. It is calculated by dividing the company's net income by its shareholder equity and expressing the result as a percentage.

Net income is a company's profit from its normal business operations, after deducting operating expenses and taxes. Shareholder equity is the portion of a company's assets that is owned by its shareholders. It is calculated as the difference between the company's total assets and its total liabilities.

ROE is used to evaluate the efficiency and effectiveness of a company's use of shareholder capital to generate profits. A high ROE indicates that the company is generating a good return on its shareholder equity, while a low ROE may indicate that the company's shareholder equity is not being used effectively.

ROE can be a useful metric for comparing the performance of different companies within the same industry, as it allows investors to see which companies are generating the highest returns on their shareholder equity. It can also be useful for comparing the performance of a company over time, as it shows whether the company is becoming more or less efficient at generating profits from its shareholder equity.