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Return On Equity - ROE
What does it mean?
A measure of a corporation's profitability, calculated as:
The ROE is useful in comparing the profitability of a company to other firms in the same industry.
In Other Words...
The ROE is useful in comparing the profitability of a company to other firms in the same industry.
There are several variations on the formula that investors may use:
1. Investors wishing to decipher the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholder's equity, so that ROCE = (Net Income - Preferred Dividends)/Common Equity.
2. Return on equity may also be calculated by dividing net income by average shareholder's equity, (rather than shareholder's equity), over the period. Average shareholder's equity calculated by adding beginning shareholders equity to ending shareholder's equity and dividing the result by 2.
3. Investors may also calculate ROE using either beginning shareholder's equity or ending shareholder's equity as the denominator. Calculating both beginning and ending shareholder's equity allows an investor to determine the change in profitability over the period.
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Related Terms
Du Pont Identity | Net Income | Return on Assets- ROA | Shareholders Equity
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