EFINITION of ‘Return On Equity – ROE’
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder’s Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder’s equity does not include preferred shares.
Also known as “return on net worth” (RONW).
ROE represents the price of capital (not the price of capital). It depends on the average interest rate, but it also depends on the price of capital and other two elements (technology, human). Large scale investment is indeed low ROE. But the supply of technology and human capital if the synchronization increases, it will increase the ROE.