Description
Return On Equity (ROE) represents the profitability of a company as compared to Shareholders’ Equity. That is, it is the return that shareholders’ are getting on their investment. This is calculated by dividing Net Income for the period of interest by Shareholder’s Equity (SE). Typically, Shareholders’ Equity is calculated by taking the SE at the beginning of a given period (such as the most recent quarter) as well as the end of the period and dividing by 2 to get an average.
Calculation
Return On Equity (ROE) = Net Income / Shareholders’ Equity
What it Means
When evaluating any investment, we want to know what kind of return we are getting (or will be getting) on our money. ROE is the measure investors use to evaluate how profitable a company is from a shareholder perspective.