Summary
Return on Equity, or ROE, measures how effectively a company generates profit from shareholders’ equity. It shows how much profit is earned for each unit of shareholder capital.
ROE is one of the most widely used measures of profitability and management effectiveness.
Why it matters
ROE helps investors assess whether a company is using shareholder funds efficiently. A consistently strong ROE may suggest a high-quality business with good profitability.
It is often used to compare companies within the same industry.
How it is calculated
Return on Equity = Net Income ÷ Average Total Equity × 100
How to read it
A higher ROE is generally positive, but it should be interpreted carefully. High ROE may reflect strong profitability, but it can also be influenced by high debt or a smaller equity base.
Investors should review ROE together with leverage, margins, growth, and cash flow.