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Return on Equity (ROE)

Understanding Return on Equity (ROE): Measuring Profitability

Return on Equity (ROE) is a financial metric that measures the profitability of a company in generating earnings from its shareholders' equity. It indicates how effectively the management is using the company’s assets to create profits and is a key indicator of financial performance and efficiency.

ROE= (Net Income / Shareholders’ Equity) × 100


Suppose Company PQR has the following financial details:


  • Net Income: $500,000

  • Shareholders' Equity: $2,000,000


To calculate the Return on Equity:


  1. Divide net income by shareholders' equity and multiply by 100: (500,000/2,000,000)×100=25%

An ROE of 25% indicates that Company PQR generates a return of 25 cents for every dollar of shareholders' equity. This suggests effective management and good use of equity to generate profits

Profitability Ratio

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