Return on Equity (ROE)

ROE is calculated by taking Net Income / Shareholders Equity and is expressed as a percent. Useful for comparisons between Companies.

Like ROA, ROE is an easy to calculate financial ratio that indicates the level of profitability generated by the level of Shareholder’s Funds employed. Expressed as a percent is calculated by the formula.

ROE = Net Income / Shareholder’s Funds

ROE is not a Valuation Ratio, thus not used to place a Target Price. In evaluating ROE, the Leverage Ratio should be taken into consideration. When using ROE for comparative analysis, a higher leveraged company could have a higher ROE. But excessive leverage could put Shareholder’s Capital at greater risk of default. ROE measures a Company’s profitability used by both Management and Investors, useful for Inter Sectorial comparisons. A higher ROE is better if the level of debt is manageable.