| ROE See return on equity. |
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
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