What is Return on Equity?

Definition of Return on Equity (ROE)?

Return on Equity (ROE) is a measure of how effectively management is using a company’s assets to create profits. It’s calculated by dividing a company’s annual return (net income) by average shareholders’ equity and is expressed as a percentage.

ROE formula

The formula for calculating ROE is:

Return on Equity = net income / average shareholders’ equity

What’s ROE used for?

ROE can be useful for assessing the performance of companies in the same industry and can provide insight into how equity is being used to grow a business. A rising ROE indicates that a company is increasing its ability to generate profit without needing as much capital.