What is Return on Equity Ratio

What is Return on Equity Ratio? Calculating return on equity (ROE) and why ROE is so important.

Return on Investment

While return on total equity directly measures how a company’s management performance increases return to shareholders, return on total assets measures the operating efficiency and management performance of a business. Together, these two values give us a good idea of a business’s potential return on investment.

Return on Equity Ratio

The return on equity ratio is a measure of the absolute return to shareholders. The higher this figure, the higher the share price of the equity and the easier it will be for the company to attract new funds. Investors are most interested in investing in companies with a strong ability to deliver on investments. The continuous inflow of new funds sets up a virtuous circle that stimulates the growth of the company, brings in even more profits and therefore increases the company’s ability to give back to shareholders.

Thus, out of all the financial ratios available, the return on equity is the most important determinant of a company’s value.

Calculating Return on Equity

How to calculate return on equity?

Return on equity = 100 multiplied by (Net Profit / Owners’ Funds).

The higher this percentage, the higher the absolute return to shareholders.

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