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.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

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

Explanation: ROE shows how effectively management is using a company's assets to create profits. Higher ROE indicates more efficient use of equity.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors to assess a company's profitability and compare it with competitors. It helps evaluate management's efficiency at generating profits from shareholders' investments.

4. Using the Calculator

Tips: Enter net income and equity in dollars. Both values must be positive, and equity cannot be zero (as division by zero is undefined).

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: Generally, 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: Yes, extremely high ROE may indicate excessive debt (financial leverage) or inconsistent profits, which could be risky.

Q3: How does ROE differ from ROI?
A: ROI measures return on any investment, while ROE specifically measures return on shareholders' equity investment in a company.

Q4: When is ROE most useful?
A: When comparing companies in the same industry, or tracking a company's performance over time.

Q5: What are limitations of ROE?
A: Doesn't account for debt levels, can be manipulated through share buybacks, and varies across industries.