Return on Equity

Return on equityReturn on equity (ROE) is the rate of return that a company ... More (ROE) is the rate of return that a company generates with the moneyMoney is a generally accepted medium of exchange to buy and... More shareholders have invested.

It is calculated with the following formula:

If the net income of the company is $10,000 and shareholders have invested $100,000, the ROE would be 10%. Net income is for the whole fiscal year. It does not include dividends paid to common stock holders (which is calculated with a different formula), but it does include the dividends paid to preferred stock. Shareholder’s equityWhat is equity? In accounting and finance, equity is the r... More does not include preferred sharesWhat are value stocks? A value company is a company that app... More.

For common stocks, the Return on Common Equity (ROCE) formula is:

The return on equity shows how efficient the company is with the money that shareholders have invested. The ROE of a company should be used in conjunction with other companies from the same industry in orderWhat is a trade order? In trading, an order can be defined... More to see how profitable the company is compared to the competition.

Note that a high ROE offers no immediate benefit to investors. Share prices are chiefly affected by earnings per share (EPS), meaning you would pay twice as much (based on the price/book ratio) for a 20% ROE company as you would for a 10% ROE company.

However, when the earnings are reinvested in the company at a high ROE rate, this delivers a high growth rate. InvestorAn investor is someone who spends capital with the expecta... More benefits can also come in the shape of a dividendWhat is a dividend? A dividend is a payment made by a comp... More on common shares or as a combination of dividends and reinvestment in the company.