Return on Equity (ROE)

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Definition: Return on Equity (ROE)

Return on Equity is one of the profitability ratios. It shows us how much of the net income is generated from the equity of a company. If the ROE is high it is better for the companies investors. It is calculated as:

ROE        =             Net Income

                     Average Total Equity


Company A is having equity (including Preferred Stock)  of 1000 crore in year 2004 and 2000 crore in year 2005. Its net income at end of 2005 is 100 crore.

Average total equity of company A  = (1000 + 2000)/2

                                                   = 1500 crore

Return on Equity  =   100/1500

                          = 0.067 = 6.7%

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