1. What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio that measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. It's expressed as a percentage and is a key indicator of financial performance.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

• \( \text{Net Income} \) — Company's total earnings after expenses and taxes (in $)
• \( \text{Shareholders' Equity} \) — Total assets minus total liabilities (in $)

Explanation: ROE shows how effectively management is using a company's assets to create profits. Higher ROE values generally indicate more efficient management.

3. Importance of ROE Calculation

Details: ROE is crucial for investors to assess a company's profitability and compare it with peers in the same industry. It helps in evaluating investment potential and management efficiency.

4. Using the Calculator

Tips: Enter net income and shareholders' equity in dollars. Both values must be positive, and equity cannot be zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: Generally, an ROE between 15-20% is considered good, but this varies by industry. Compare with industry averages for meaningful analysis.

Q2: Can ROE be too high?
A: Extremely high ROE may indicate excessive debt or inconsistent profits. It's important to analyze alongside other financial metrics.

Q3: How often should ROE be calculated?
A: Typically calculated quarterly with financial statements, but annual ROE provides better insight into long-term trends.

Q4: What's the difference between ROE and ROI?
A: ROE measures return on shareholders' equity, while ROI (Return on Investment) measures return on any invested amount regardless of funding source.

Q5: Does ROE work for all companies?
A: ROE is most meaningful for companies with positive equity. For companies with negative equity, ROE becomes less informative.