Return On Equity - ROE

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expssed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before pidends paid to common stock holders but after pidends to pferred stock.) Shareholder's equity does not include pferred shares.

Also known as "return on net worth" (RONW).

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Watch: Return On Equity

|||The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting pferred pidends from net income and subtracting pferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - pferred pidends / common equity.

2. Return on equity may also be calculated by piding net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and piding the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.