Return on equity (ROE) is a financial ratio that measures the profitability of a company in relation to its shareholder’s equity. It is a key indicator of how effectively a company is using the investments made by its shareholders to generate profits. Generally, a higher ROE suggests that a company is more efficient at converting the investment it receives into earnings. However, it is important to compare the ROE with companies in the same industry, as different industries have different norms.
This page covers the following topics related to ROE:
Formula Deep Dive
Return on Equity (ROE) = Net Income / Shareholder’s Equity
- Net Income: Profit of a company after all expenses have been deducted
- Shareholder’s Equity: Total assets minus total liabilities
ROE is used to assess how well a company’s management is using the company’s capital to generate profits. It is particularly useful for comparing the profitability of companies within the same industry. A high ROE indicates effective management and potentially a good investment, but it can also be inflated by high levels of debt, so it should be used in conjunction with other financial ratios.
Application in Excel
To calculate ROE in Excel, you would divide the net income by shareholder’s equity. Assume the net income is in cell B35, and the shareholder’s equity is in cell B21.
This Excel formula calculates the ROE by dividing the net income by the shareholder’s equity. ROE is a valuable tool for investors and analysts to evaluate a company’s financial performance and compare it with its peers.
Related Topics
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