Return on Equity (ROE)
Net income as a percentage of shareholders’ equity, measuring how effectively the business generates profit from equity
What is Return on Equity (ROE)?
Return on equity shows how much profit a business earns for each unit of shareholders' equity. It measures how well the business turns owners' money into profit.
Investors use it to judge profitability, but it can be boosted by borrowing, so it needs to be read with debt levels.
How this KPI is measured
- Function
- Finance
- Sub-function
- Financial Reporting
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- %
- Measurement frequency
- Quarterly / Annual
- Formula
- (Net income / Average shareholders’ equity) × 100
How to calculate it
Divide net income by average shareholders' equity, and multiply by 100.
For example, if net income is 6,000,000 and average equity is 40,000,000, ROE is 15%.
Use average equity, and remember that high debt can raise ROE and risk together. Compare with similar businesses.
Where it is used
Assessing returns to owners
See profit on equity.
Comparing companies
Benchmark peers.
Tracking performance
Follow the trend.
How to improve it
Tips and common mistakes
- High ROE from heavy debt is riskier than it looks.
- Negative equity distorts the ratio.
- Read with ROA and debt measures.
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