Return on Equity (ROE)

Return on Equity (ROE) is a financial metric used to assess a company’s profitability in relation to shareholders’ equity. It measures how effectively management is using a company’s assets to create profits. ROE is calculated by dividing Net Income by shareholders’ equity, expressed as a percentage.

Formula: ROE = (Net Income / Shareholders’ Equity) x 100

Example: If a company has a net income of $1,000,000 and total shareholders’ equity of $5,000,000, the ROE would be calculated as follows:

ROE = ($1,000,000 / $5,000,000) x 100 = 20%

Case: Company A has an ROE of 15%, indicating that it generates $0.15 of profit for every dollar of equity. In contrast, Company B has an ROE of 25%, suggesting it is more efficient at generating profits from its equity, making it potentially a more attractive investment.