return on equity
Also found in: Dictionary
Related to return on equity: Return on Investment
, Return on capital employed
, Return on assets
Return on Equity
A publicly-traded company
divided by the amount of money invested
, expressed as a percentage. This is a measure of how well the company is investing
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
of publicly-traded companies' health. See also: Growth stock
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
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.