Return on Equity

Return on Equity

Return on equity measures the net profits generated by a company’s shareholders’ equity. It measures how efficiently a company is utilising its capital to generate profits. ROE is measured by dividing net earnings by average shareholders’ equity (i.e. net worth). A company that generates the same level of profits as a competitor on a smaller capital base is by definition utilising its capital more efficiently therefore should be more attractive to investors.

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