Short definition: Return on equity (ROE) is a financial ratio that measures a company’s profitability by calculating how much profit a company generates with the money shareholders have invested.
Explanation: ROE is expressed as a percentage and is calculated by dividing a company’s net income by its average shareholders’ equity. A higher ROE indicates that a company is more efficient at generating profits from its equity.
Example: A company with a net income of $1 million and average shareholders’ equity of $10 million would have an ROE of 10%.
Additional information (optional): ROE is a useful tool for comparing the profitability of different companies within the same industry. However, it should not be used as the sole measure of a company’s performance, as it can be influenced by a variety of factors, such as a company’s financial leverage and accounting practices.