Return on Equity (ROE)

Return on Equity (ROE): It measures the rate of return on the shareholder/ownership investment in the company also know as shareholder’s equity. It basically determines the firm’s efficiency to generate profits to the equity shareholders.

Formula: Net Income – Preference Dividend (if any)

                                  Shareholder’s Equity

Implication: Over here we are only talking about the common equity shareholder, which excludes preference shareholders. The financial metric is used mainly for two reasons.

1. How much is the firm’s earning for per equity share.
2. How much efficient the firm is when compared with its peers/competitors. A firm showing ROE as 15% may be considered fair but may not be good enough if the industry average is above 15%.