Return on Equity

The Return on Equity (ROE) or Return on Net Worth is a financial ratio that provides information about a company’s profitability in relation to the book value of shareholder equity. More specifically, it shows the relationship between net income available to the common stockholders and their average common equity invested in the company. It therefore measures how well a company uses investments to generate earnings growth. ROE is especially used for comparing the performance of companies in the same industry. The ROE equation is: Net income divided by total (book value of) equity. An ROE of 15-20% is generally considered good.