Sitemap

Return on equity definition

Description

ROE is a ratio that indicates how well a company operates its’ assets. It also reveals how much income a company gets in comparison with the shareholder’s equity. Data to calculate this ratio is collected from the income statement and balance sheets.

Return of equity ratio is important to the company’s owners, as it shows the amount of profit that is returned to them. ROE most often is expressed in percentages.

Norms and limitations

It is considered that a ROE of at least 10% per year is not bad, 15% - good.

ROE value norms can differ depending on the industry the company is operating in. Also it depends on the general economic situation of the specific country. During the economic crisis, ROE value of 5% can be consider as a good result.

Formula

Net income (net profit, net earnings) usually called “the bottom line” is a measure which is calculated by taking revenues (sales and other incomes) and adjusting them to the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.

Shareholders’ equity shows the equity stake currently held on company’s balance sheet. In other words, it means total assets minus total liabilities.