What is Return On Equity ?
501 reads · Last updated: December 5, 2024
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets.ROE is considered a gauge of a corporation's profitability and how efficient it is in generating profits. The higher the ROE, the more efficient a company's management is at generating income and growth from its equity financing.ROE is expressed as a percentage and can be calculated for any company if net income and equity are both positive numbers. Net income is calculated before dividends paid to common shareholders and after dividends to preferred shareholders and interest to lenders.
Definition
Return on Equity (ROE) is a financial performance indicator calculated by dividing net income by shareholders' equity. It is considered a measure of a company's profitability and efficiency in generating profits. A higher ROE indicates that the company's management is more efficient at generating income and growth from equity financing.
Origin
The concept of Return on Equity originated in the early 20th century, becoming widely used with the development of modern financial analysis methods. Initially, it was used to assess a company's efficiency in using shareholders' funds and has evolved into a key indicator for investors and analysts to evaluate a company's financial health.
Categories and Features
ROE can be categorized into basic ROE and adjusted ROE. Basic ROE uses net income and shareholders' equity directly from financial statements, while adjusted ROE may consider non-recurring items or other adjustments. The main feature of ROE is its ability to reflect a company's efficiency and profitability in utilizing shareholders' funds.
Case Studies
A typical case is Apple Inc., which has maintained a high ROE, reflecting its success in technological innovation and market expansion. Another example is Coca-Cola, which has maintained a stable ROE through its brand value and strong global market influence.
Common Issues
Investors may encounter issues when using ROE, such as how to handle situations with negative net income or shareholders' equity, and how to compare companies across different industries. Typically, negative net income or equity will result in an inability to calculate ROE, and ROE standards may vary across industries.
