Financial Glossary: Return on Equity (ROE)


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Return on Equity (ROE)

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Return on Equity (ROE)

Return on Equity (ROE)

This is the most popular indicator of financial performance.

It basically measures the company's efficiency in earning profits on behalf of its shareholders. Basically, the return on Equity is found by dividing pre-Tax profit by shareholders' funds. Also known as "return on Net worth" (RONW).   The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

To be precise: ROE = (profits after Interest and preference Dividend but before Tax) divided by (average shareholders funds plus any reserves and retained profits).

This is a book ratio that, in some ways, is like the "Earnings per share" market ratio. Instead of dividing profit between the number of shares in the marketplace, it divides it by the capital sum which Equity financing has actually raised for the company.

Shareholders' funds are the Book Value of the amount shareholders own - a company's total assets minus total liabilities.

As the ratio indicates how much profit is generated from assets, the higher the figure the better.

Posted by Privatebanking.com

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