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Return on Equity (ROE)

 

What Is Return on Equity?

Return on Equity (ROE) is a ratio expressed as a percentage. It measures the profitability of a business relative to shareholder’s equity.

ROE is used to determine how well a company generates earnings growth from the cash invested in the business. It is particularly useful for evaluating company performance within an industry and for determining if a company is becoming more or less profitable when compared to its past ROE.

An ROE of 15-20% is considered good. A value above 20% can indicate very strong performance, but it can also be an indication that company management has increased the business’s exposure to risk by borrowing against company assets.

An ROE of 15-20% is considered good. A value above 20% can indicate very strong performance, but it can also be an indication that company management has increased the business’s exposure to risk by borrowing against company assets.
An ROE of 15-20% is considered good. A value above 20% can indicate very strong performance, but it can also be an indication that company management has increased the business’s exposure to risk by borrowing against company assets.

Below 15% might signal very conservative company management, which could also warn of trouble.

How to Calculate and Use ROE?

ROE = Net Income (annualized)/Shareholder’s Equity

In order to get the whole picture of a company’s profitability when using ROE, some considerations are necessary. For example, ROE does not indicate whether or not a company is relying on debt to generate better returns. If the company has used leverage to generate higher ROE, it has also taken on more risk. That could become an issue in the future.

Also, ROE can be inflated when a company repurchases its shares, which reduces the denominator of the equation. Furthermore, the ROE at one company may not include intangible assets like trademarks, copyrights, and patents, which may have been included by other industry peers.

Where You Can Find ROE Information At Investing.com?

Return on equity calculations for every company on Investing.com can be found via the Ratios link under the Financials tab of the main menu, e.g., Amazon (NASDAQ:AMZN). Scroll down the page to the Management Effectiveness section where a chart and table of several profitability ratios can be found.

ROE Information At Investing

The current return on equity TTM (trailing twelve months) is first in the table, followed by the 5YA (5 year average). These numbers are also charted above the table for an easy visual comparison.

Note that the first column on the right side of the table is the ROE for the company, and the second column is the ROE for the industry which provides additional perspective about company performance relative to industry peers.

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