Quick Definition

Return on Equity (ROE) is a financial ratio that measures the profitability of a company relative to its shareholders' equity, indicating how effectively management is using a company’s assets to create profits.

Formula

Examples

• 1A company with a net income of $1 million and shareholders' equity of $5 million has an ROE of 20%.
• 2If a company increases its net income while maintaining the same level of shareholders' equity, its ROE will increase, demonstrating more efficient use of equity.
• 3Comparing the ROE of different companies in the same industry can help investors identify which companies are generating more income per dollar of equity.

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