| the amount of profit computed by dividing net income before taxes less preferred dividends by the value of stockholders' equity, usually expressed as a percentage. Abbreviation: ROE |
Return On Equity - ROE
A measure of a corporation's profitability, calculated as:
Essentially, ROE reveals how much profit a company generates with the money shareholders have invested in it.
Investopedia Commentary
The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
There are several variations on the formula that investors may use:
1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: Return on Common Equity (ROCE) = Net Income - Preferred Dividends / Common Equity.
2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders’ equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.
3. Investors may also calculate the change in ROE for a period, first by using shareholders' equity at the start of the period as the denominator and then using shareholders' equity at the end of the period as the denominator. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.
Related Links
Keep Your Eyes On The ROE
Understanding The Subtleties Of ROA Vs ROE
Ratio Analysis Tutorial
See also: Du Pont Identity, Net Income - NI, Return on Assets - ROA, Return on Capital Employed - ROCE, Return On Gross Invested Capital - ROGIC, Shareholders' Equity
Also spelled: Return-on-equityROE