return on equity (redirected from Return on net worth)

Return on equity (ROE)

Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

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return on equity (ROE)

A measure of the net income that a firm is able to earn as a percent of stockholders' investment. Many analysts consider ROE the single most important financial ratio applying to stockholders and the best measure of performance by a firm's management. Return on equity is calculated by dividing net income after taxes by owners' equity. Compare profitability ratio. See also return on common stock equity.

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Return On Equity

A publicly-traded company's earnings divided by the amount of money invested in common stock, expressed as a percentage. This is a measure of how well the company is investing the money invested in it. A high return on equity indicates that the company is spending wisely and is likely profitable; a low return on equity indicates the opposite. As a result, high returns on equity lead to higher stock prices. Some analysts believe that return on equity is the single most important indicator in publicly-traded companies. See also: Growth stock.

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Return on equity. Return on equity (ROE) measures how much a company earns within a specific period in relation to the amount that's invested in its common stock.

It is calculated by dividing the company's net income before common stock dividends are paid by the company's net worth, which is the stockholders' equity.

If the ROE is higher than the company's return on assets, it may be a sign that management is using leverage to increase profits and profit margins.

In general, it's considered a sign of good management when a company's performance over time is at least as good as the average return on equity for other companies in the same industry.

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return on equity

See equity dividend.

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Return on Equity (ROE)

What Does Return on Equity (ROE) Mean?

A measure of a corporation's profitability; ROE reveals how much profit a company generates with the money shareholders have invested. Also known as return on net worth (RONW). It is calculated as shown here:

Investopedia explains Return on Equity (ROE)

ROE is useful for comparing the profitability of a company with that of other firms in the same industry. There are several ways for investors to use ROE: (1) Investors want to see the return on common equity so they may modify the formula shown here 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 also may be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding shareholders' equity at the beginning of a period to shareholders' equity at the end of the period and dividing the result by 2. (3) Investors also can calculate the change in ROE for a period by using the shareholders' equity figure from the beginning of a period as a denominator to calculate the beginning ROE. Then the end-of-period shareholders' equity can be used as the denominator to calculate the ending ROE. Calculating both helps investors determine the change in profitability over the period.

Related Terms:
• Equity
• Gross Margin
• Profitability Ratios
• Return on Assets—ROA
• Shareholders' Equity