What Is ROE? A Beginner’s Guide to Return on Equity

ROE or Return on Equity is a metric for calculating the company's financial performance. It refers to a measurement of a corporation or an enterprise, performance in a given period. This shows how effectively a company uses the money invested by its shareholders to generate profit. Let’s explore what is ROE means.

How to Calculate ROE?

Here is how to calculate the Return on Equity:

The formula of Return on Equity is:

Return on Equity = Net Income / Shareholders’ Equity

Where,

Net Income = Business profit after all taxes and expenses.

Shareholders’ Equity = Total assets minus total liabilities (the net value belonging to shareholders)

Example of ROE

For Example, suppose that a company has,

	Value
Net Income	20,00,000
Shareholder equity	1,00,00,000

Earnings per share = 20,00,000 / 1,00,00,000 = INR 0.20 or 20%

So this means the company generates a 20% return on every equity invested.

What is a Good ROE?

Well, a good Return on Equity depends on the Industry,

A 15% to 20% Return on Equity percentage is strong for most sectors.
The average Return on Equity is 16.5% for U.S. companies.
Compare Return on Equity to the industry peer for meaningful analysis, as capital intensity and the profit margin also vary by sector.

Conclusion

In conclusion, Return on Equity is a powerful tool for assessing a business's efficiency in generating profits from equity. However, it should be examined alongside other financial metrics and within industry context for a full picture. We hope this blog has been helpful for you.

About the Author

Saniya

I am a writer, and this sentence speaks louder than anything, I love to play with words because I have a passion for writing easy and good-quality content that reflects simplicity. Readers like content that is straightforward with simple language. My priority has always been to deliver content that connects with the reader.

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