Return On Equity - ROE

Return On Equity - ROE

A measure of a corporation's profitability, calculated as:





Essentially, ROE reveals how much profit a company generates with the money shareholders have invested in the company.

Notes:

The ROE is useful for comparing the profitability of a company to other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: Return on Common Equity (ROCE) = Net Income - Preferred Dividends)/Common Equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity, (rather than shareholder's equity). Average shareholder's equity is calculated by adding a period's beginning shareholders' equity to its ending shareholders' equity and dividing the result by two.

3. Investors may also calculate ROE for a period, first by using the beginning shareholders' equity as the denominator and then using ending shareholders' equity as the denominator. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.

See also: Du Pont Identity, Net Income, Return on Assets- ROA, Shareholders' Equity