1. What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio that measures a company's profitability by showing how much profit a company generates with the money shareholders have invested. It's expressed as a percentage and is particularly important for investors in South Africa to assess company performance.

2. How ROE is Calculated in South Africa

The standard formula for ROE is:

Where:

• Net Income — The company's total earnings after all expenses and taxes (in ZAR for South African companies)
• Shareholders' Equity — Total assets minus total liabilities (also called book value)

South African Context: In South Africa, ROE calculations follow IFRS accounting standards. Net income should be the after-tax figure from the income statement, and equity should be the average shareholders' equity over the period being measured.

3. Importance of ROE Calculation

Details: ROE is a key metric for South African investors and analysts because:

• Measures how effectively management is using shareholders' capital
• Helps compare profitability of companies in the same industry
• Indicates growth potential as earnings can be reinvested
• Used in valuation models for South African stocks

4. Using the Calculator

Tips:

• Enter net income in South African Rand (ZAR)
• Enter shareholders' equity in ZAR
• For more accurate results, use average shareholders' equity if available
• Values must be positive (equity must be greater than zero)

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE in South Africa?
A: Generally, ROE above 15% is considered good, but this varies by industry. Compare with industry peers for meaningful analysis.

Q2: How often should ROE be calculated?
A: Typically calculated quarterly or annually, along with financial reporting periods.

Q3: Can ROE be too high?
A: Exceptionally high ROE may indicate excessive leverage (debt) rather than true operational efficiency.

Q4: How does South African tax affect ROE?
A: Since ROE uses after-tax income, South Africa's corporate tax rate (currently 28%) is already factored in.

Q5: What's the difference between ROE and ROI?
A: ROE measures return on shareholders' equity specifically, while ROI (Return on Investment) can refer to any type of investment.