Return on Equity (ROE) is one of the financial ratios used by stock investors in analyzing stocks.
ROE indicates how effective the management team is in generating profit with money invested.
The higher the ROE, the more profit a company is making from a specific amount invested.
Formula to calculate ROE.
Net income is the residual amount of earnings after all expenses have been deducted from sales.
Shareholders equity is the difference between total assets and total liabilities.
Example:
Mother and Daughters Limited Company reported a net income of $4 billion and total shareholders’ equity of $47.6 billion. Calculate the return on equity.
Therefore, the return on equity of the company is 8.4%.
