Return on Equity (ROE)

Definition

Return on equity (ROE) is a ratio that measures the return to a company's stockholders by relating profits to shareholder equity.

Calculation

Return on Equity = Net Income / Average Shareholders' Equity

Let's apply the following to the equation above: Company A has a net income of $500 and their average shareholders' equity is the $1500

$500/$1500 = 33.33% ROE

This means that Company A's shareholder's can expect approximately 33 cents payoff per dollar of equity.

Why is this important?

ROE is a measure of a company's overall profitability and is closely watched by investors because it is directly linked to profits, growth, and dividends.

How do I know if the ROE is good for a company?

In general, the higher the ROE the better. However, if you want to gauge if a company's is in a good in in fair range for ROE you should compare to its peers in order to understand what the industry average is. If a stock has an above average ROE to its peers it could be inferred that the company's leadership team is better than its peers at generating profits from a company's assets.

Financial Glossary Reference

logo-white
Help CenterCOVID-19 TrackerChrome ExtensionChart BuilderFeaturesBlogStock Rating SystemResearch DisclosurePrivacy PolicyFinancial GlossaryTerms of UseDisclaimersCookie Policy

Made in Chicago, IL.

© EEON, Inc. - All Rights Reserved.