Return on Equity

Measures profitability and how effectively financial resources are used.

Return on Equity

Measures profitability and how effectively financial resources are used.

Return on Equity

Measures profitability and how effectively financial resources are used.

Formula

Return on Equity = Net Income / Shareholder's Equity

Know your metric

Importance of

Return on Equity

  1. Profitability Indicator

ROE is a significant measure of a company's profitability and efficiency in generating profits from shareholders' equity, providing insights into financial health and management effectiveness.


  1. Investment Attractiveness

A high ROE is attractive to investors as it indicates the company is using its equity base effectively to generate returns, making it a potentially lucrative investment.


  1. Comparative Metric

ROE allows for comparison between companies in the same industry, helping assess competitive standing and investment desirability.

Drawbacks of

Return on Equity

  1. Debt Influence

High debt levels can artificially inflate ROE, as the ratio does not distinguish returns generated from equity versus borrowed funds.


  1. Not Sector Agnostic

ROE can vary significantly across different industries, making it less effective for cross-sector comparison.


  1. Short-Term Focused

Companies might focus on short-term gains to improve ROE, potentially sacrificing long-term sustainability and growth.

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