Return on Equity

Return on Equity (ROE) is a measure of financial performance, and it’s calculated by dividing net income by shareholders’ equity. ROE is expressed as a percentage and indicates how much profit a company generates with the money shareholders have invested.

The formula for calculating ROE is:

Return on Equity = Net Income / Shareholder’s Equity

Here’s a little more detail about each component:

– Net Income: This is the bottom line of a company’s income statement. This is the profit that the company has earned after subtracting all its costs, including operating expenses, interest, taxes, and cost of goods sold (COGS) from its revenue.

– Shareholder’s Equity: This is the residual interest in the assets of an entity that remains after deducting liabilities. In other words, it’s what the shareholders own outright. You can find this figure on a company’s balance sheet. It’s equal to a company’s total assets minus its total liabilities.

The ROE is especially useful for comparing the profitability of companies in the same industry. As with return on assets (ROA), a higher ROE is generally better; however, extremely high ROE can be an indication of significant financial leverage or risk. It’s important to consider other financial metrics along with ROE when assessing a company’s performance and financial health.