Investment School: what is return on equity?

what is return on equity?

Let us dig through yet another important technical criteria associate with a stock - Return on Equity(ROE). It is simple to calculate and helps in measuring the profitability and asset management of the company.

Return on Income = Net Income/Shareholder's equity

Net Income can be obtained from Profit and Loss statement and Shareholder's equity can be obtained from the balance sheet.

ROE indicates if a company is creating assets or eating up lot of cash in due course of doing its business.

If ROE is 15%, it means 15 rs of asset is created for every 100 rs invested in the stock.ROE also indicates if the additional cash investment made by the company is produced by the return on existing investment or out of fresh cash investment.

ROE can also be interpreted as

ROE = (one year's earnings / one year's sales) x (one year's sales / assets) x (assets / shareholder equity)

Lets see how ROE can give information on profit margin,asset management in the next articles.

Learn More : What is Earnings per share?

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