Return on Equity (ROE) Ratio Definition, Formula and Example

Return on Equity (ROE) Ratio is a financial ratio which represents the net income which a company is earning as per total value of outstanding shares.  Which also can be understood that ROE ratio is a profitability ratio which measures the ability of the firm for generating profits by the investments made by the shareholders in the company. In Other words, return on equity ratio provides information on how much profit can be generated periodically by shareholder’s capital.

ROE Ratio is also an indicator which represents on how effective the management is at using shareholders fund for it’s operations and grow the company.

Formula for Return on Equity (ROE) Ratio

Return on Equity is calculated by dividing Net Income by shareholder equity.

Return on Equity ROE = Net income Shareholder’s equity

How to calculate Return on Equity Ratio?

For calculating Return on Equity Ratio, the below metrics are required.

Net Income : Net Income is calculated by Subtracting companies total revenue by total expenses.

Formula for Net Income : Total Revenue – Total Expenses.

Share holders Equity: It is calculated by subtracting companies total assets by total liabilities.

Formula for Shareholder’s equity = Total Assets – Total Liabilities

Return on Equity ROE = Net income / Shareholder’s equity

Return on Equity  Ratio Example

InvestSahi stock is a retail store which sells tools to construction companies across the state. Investsahi reported a net income of INR100,000 and its share holder equity is INR 50000

The Return on Equity ratio of InvestSahi is as below

Return on Equity Ratio Calculation : Net income Shareholder’s equity

Net income = INR100000

Shareholder’s equity=INR50000

InvestSahi Return on Equity ratio = 100000/50000 = 2%

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