1. What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio that measures a company's profitability relative to shareholders' equity. It shows how effectively management is using a company's assets to create profits.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

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

Explanation: ROE is expressed as a percentage, showing how many dollars of profit each dollar of shareholders' equity generates.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors to assess a company's profitability and efficiency in generating returns on equity investments. It's particularly useful for comparing companies in the same industry.

4. Using the Calculator

Tips: Enter net income and shareholders' equity in dollars. Both values must be positive (equity must be greater than 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: Exceptionally high ROE may indicate excessive leverage (debt) or inconsistent profits. Sustainable ROE is more valuable than temporarily high ROE.

Q3: How does ROE differ from ROI?
A: ROE focuses specifically on returns generated on shareholders' equity, while ROI (Return on Investment) measures returns relative to any invested capital.

Q4: Why is ROE important for investors?
A: ROE helps investors assess how efficiently a company uses its equity base to generate profits, which is crucial for evaluating investment potential.

Q5: How often should ROE be calculated?
A: ROE should be calculated quarterly and annually to track performance trends over time and compare with competitors.