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Return on Equity: Definition and Meaning
Definition
Return on equity, commonly called ROE, is a profitability measure that compares net income with average equity.
Why It Matters
ROE can help owners evaluate the earnings generated relative to their invested or retained capital. It is often used in financial analysis, but it should be considered alongside leverage, debt, cash flow, capital needs, and the stability of earnings.
A high ROE may result from strong profitability, low equity, significant leverage, or a combination of factors. It should not be viewed in isolation.
Example
A company earns $50,000 of net income on average equity of $250,000. Its ROE is 20 percent.
Related Terms
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