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: The formula shows what percentage of each dollar of shareholders' equity is earned as net income.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors as it shows how effectively management is using equity financing to grow the business. Higher ROE generally indicates more efficient use of equity.

4. Using the Calculator

Tips: Enter net income and equity in the same currency units (both in dollars, euros, etc.). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: While it varies by industry, generally an ROE of 15-20% is considered good. Compare with industry averages for meaningful analysis.

Q2: Can ROE be too high?
A: Extremely high ROE might indicate excessive debt (as equity is reduced) or inconsistent profits. Sustainable ROE is more valuable than temporarily high ROE.

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: What are limitations of ROE?
A: ROE can be manipulated through share buybacks or increased debt. It doesn't account for risk or capital structure.

Q5: How often should ROE be calculated?
A: Typically calculated quarterly or annually, but more frequent calculation can help track performance trends.