What Is Return on Equity?
What return on equity tells you about how well a company uses its money.
INVESTING MADE EASY
Anvay Adivarekar
9/23/20252 min read
Introduction
Investors want to own companies that use money wisely. One way to measure this is return on equity, or ROE. It shows how much profit a company generates with the money shareholders have invested.
How ROE Is Calculated
Return on equity equals net income divided by shareholders' equity. Shareholders' equity is what would remain if a company sold its assets and paid off its debts. If a company earns $20 million and has $100 million in equity, its ROE is 20%.
What ROE Tells You
A high ROE can mean a company is very efficient at turning investment into profit. Companies with strong brands or competitive advantages often have high ROE. Comparing ROE among companies in the same industry can help identify the strongest businesses.
Be Careful
ROE can be misleading. A company with a lot of debt may have a high ROE because its equity is small, even though debt makes it riskier. Share buybacks can also raise ROE. Looking at ROE alongside debt levels and other measures gives a clearer picture.
Conclusion
Return on equity is a powerful tool for judging a company's efficiency. Use it wisely, and it can help you find great businesses to invest in!