What is Return on Equity (ROE)?
Return on Equity (ROE) is the return gained on equity capital invested in a bank by its stockholders, measured by after-tax net income divided by total equity capital. It is a measure of business profitability equal to net after-tax income divided by the average level of shareholders’ equity in the business.
Understanding Return on Equity (ROE)
The Return On Equity (ROE) ratio effectively assesses the dividend on a common shareholder held by its shareholders. The company's ability to generate profit, in the long run, it earned from its investors is measured by its return on equity.
A profitability ratio that measures the return the company earns on every dollar of owners' and shareholders' investments, is computed by dividing net income by equity.
A high Return on Investment (ROI) indicates that an entity is more effective when applied to using financial capital to expand its firm (and is more likely to provide better returns to investors). A negative ROE, on the other hand, may suggest that a firm is disorganized and is investing the money profits in ineffective resources.
Return on Equity (ROE) = Net Income / Average Shareholders’ Equity
Practical Example
Over the past four months, Hk Limited has maintained a consistent ROE of 15%, whereas major firms in its market have achieved 10%. Based on this information, we can conclude that Corporate Hk Limited's management is more than decent at making revenue from shareholdings (assuming that loan is treated in a similar way all across the board in the car industry).
In the last three months, a Financial Company RV has maintained an ROE of 18% while other businesses in the same industry earned 20%. Despite having a better ROE than Car Manufacturer Hk Limited, Financial Corporation RV would be less productive at making revenue due to its underperformance (when the use of debts applies to the entire service sector, as compared to other existing firms).
In Sentence
- The Return on Equity (RoE) informs us how much revenue a business has for every dollar of capital it holds.
- The Return on Equity (RoE) is a measure of a company's financial performance and how effectively it makes money.