Return on Equity (ROE)

Return on Equity (ROE) is a financial ratio that measures the profitability of a company in relation to its shareholders' equity. It is calculated by dividing net income by shareholders' equity. ROE indicates how effectively a company is using the money invested by its shareholders to generate profits. A higher ROE suggests that the company is efficient at generating returns on the equity provided by its investors, making it a key metric for assessing the financial performance of a company.

Example

A company with net income of $1 million and shareholders' equity of $5 million has an ROE of 20%, indicating that it generates $0.20 of profit for every dollar of equity invested.