Return on equity : Meaning, Formula and Example

The return on equity is the amount of net income generated as a percentage of shareholders equity. If the whole concept of business, in general, is dominated by the idea that you can make some money and turn it into more money, then return on equity is the king of all ratios. It measures the company’s profitability by how much profit is generated with the money shareholders have invested.

ROE is a valuable number both on its own and compared to other companies. Ideally, you will invest in companies with the highest ROE. All companies strive to make ROE higher.

Formula for Return on net assets

\[Return\,on\,equity = \frac{{Net\,income}}{{Share\,holders\,equity}}*100\]

Example

Pidilite industries has net income in the amount of Rs9,475 and shareholders equity of Rs73,885. This gives a return on equity (ROE) of 12.83%. This means that for every Rs100 of equity the company generates Rs12.83 of net income.

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Author and Assistant Professor in Finance, Ardent fan of Arsenal FC. Always believe "The only good is knowledge and the only evil is ignorance - Socrates"
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