Return on equity
5/12/18 Return on equity
Return on equity (ROE) — also called return on net worth — is a profitability ratio that measures the ability of a firm to generate profits from its shareholders’ investments in the company. In other words, ROE calculates how many dollars of profit a company generates with each dollar of shareholders’ equity.
The return on equity ratio formula is calculated by dividing net income by shareholder’s equity. So, a return on 1 means that every dollar of common stockholders’ equity generates 1 dollar of net income.
Potential investors consider this ratio to see how efficiently a company will use their money to generate net income. Additionally, ROE is an indicator of how effective management is at using equity financing to fund operations and grow the company.