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
Example:
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%
Hence, this concludes the definition of Return on Equity (ROE) along with its overview.
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