Return on Equity (ROE)

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).

 

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