The ROE Reveals
- How much profit a company generates with the money shareholders have invested
- The amount of net income returned as a percentage of shareholders equity.
- A firm’s efficiency at generating profits and using investment funds to generate earnings growth.
- ROE tends to tell us how effectively an organization is taking advantage of its base of equity, or capital.
A ROE of 15-20% is considered good.
ROE = Net Income After Taxes for past 12 months / Stockholders’ Equity
- Stockholders’ Equity = total assets – total liabilities OR
- Stockholders’ Equity = share capital + retained earnings – Treasury Shares.
- Shareholder’s equity does not include preferred shares
- Net income is for the full fiscal year (before dividends paid to common stockholders but after dividends to preferred stock).