Return on equity

Return on Equity (ROE)

A financial ratio that measures a company’s profitability in relation to shareholders’ equity, calculated by dividing net income by average shareholders’ equity for the period.

For example, if a company generates $2 million in annual net income with average shareholders’ equity of $10 million, its ROE would be 20%, indicating it produced $0.20 of profit for each dollar of shareholder investment.

ROE is widely used to assess management’s efficiency in using equity capital to generate profits. Higher ROEs generally indicate better performance, though excessively high ratios may result from high leverage rather than operational excellence. Comparing a company’s ROE to industry peers and its own historical trends provides context for evaluation.