Return on Equity (ROE)

What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio to measure the proftability of a company. It is calculated by taking the net income the company earns and dividing it by the equity of the company, or the total shareholder's equity. In other words, it measures how much the shareholder's earn on their invested capital.

The higher the ROE, the better the company is performing and it is an important part of an investor's decision of whether to invest in a company or not. Not only does it show the earning potential of a company, but it can also offer a glimpse into the company's strategy for its future success.

How to Calculate Return on Equity (ROE) ?

Return on Equity is calculated by dividing the company's net income by the equity that shareholders have invested. This looks like the following formula:

Return on Equity = Net Income / Shareholder's Equity

Net income is the income a company earns after taxes and expenses have been paid. Shareholder's equity is the amount of money a company has left after subtracting liabilities from assets.

In other words, the Return on Equity can be seen as the return a company gives to its shareholders per dollar of invested equity.

What is a Good Return on Equity (ROE)?

A good Return on Equity varies depending on the industry that the company is in. Generally speaking, a good return is considered be anything above 15%, and well above average returns are anything above 20%.

Of course, some industries may have a higher or lower standard ROE than others. The important thing to remember is that no matter what the industry, a higher ROE usually is an indicator of a company performing better than its competition.

Return on Equity and Competitive Advantage

For investors, Return on Equity can provide an indicator of a company's competitive advantage. If a company has a higher ROE than its competitors, it could mean that the company is executing its business plan more effectively than its competitors, resulting in higher profits for its shareholders.

This could mean the company is more efficient, more organized, or better at utilizing its resources to generate profit. For investors, this could be a sign that the company is well-positioned for growth in the future.

Difference Between Return on Equity (ROE) on Equity and Return on Investment (ROI)

While eturn on Equity (ROE) and Return on Investment (ROI) have similar sounding names, they measure two different metrics. Return on Equity measures how much the shareholders earn per dollar invested, while Return on Investment measures how much the company earns per dollar invested. These metrics can be used together to help investors determine which companies are capable of executing their plans more effectively.

Both ROE and ROI are important measures of a company's performance and profitability and should be taken into consideration when making any investment decisions. Also, both metrics should be compared to industry averages to give investors a better sense of how well a certain company is performing compared to its competition.

Why is Return on Equity (ROE) Important?

Return on Equity (ROE) is important to investors because it's a measure of how well a company is utilizing its resources to generate profits for its shareholders. It's important for an investor to have an understanding of how much the company is making for every dollar of shareholder's equity invested.

The higher the ROE, the more efficiently a company is working and the more likely it is to generate higher returns for its shareholders in the future. For investors, this can be a great way to pick stocks that are likely to provide good returns in the long run.

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