Return On Equity
Return on equity (ROE) is a measure of a company's profitability that takes into account the equity held by the company's shareholders. It is a key metric that investors use to evaluate a company's performance and to compare it to other companies in the same industry.
To calculate ROE, the company's net income is divided by its shareholder equity. This results in a percentage that represents the amount of profit the company generates for every dollar of equity held by its shareholders. For example, if a company has a net income of $100,000 and shareholder equity of $500,000, its ROE would be 20% (100,000 / 500,000 = 0.20).
ROE is an important metric because it shows how well a company is using the funds provided by its shareholders to generate profit. A high ROE indicates that the company is efficient at generating profit, while a low ROE may indicate that the company is struggling to generate profit or is not using its equity efficiently.
Investors and analysts use ROE to compare the performance of different companies. For example, if Company A has an ROE of 20% and Company B has an ROE of 10%, this indicates that Company A is generating more profit per dollar of equity than Company B. This information can be useful for investors who are considering which company to invest in.
In addition to comparing companies within the same industry, investors and analysts also use ROE to compare a company's performance over time. For example, if a company's ROE decreases from 20% to 10% over a period of time, this may indicate that the company is not performing as well as it was in the past.
Overall, return on equity is a useful metric for investors and analysts to evaluate a company's performance and to compare it to other companies. By understanding ROE, investors can make more informed decisions about where to invest their money.