Return On Equity

What Does Return On Equity Mean?

Return on Equity (ROE) is a percentage that measures a company’s profitability by comparing its net income to the shareholders’ equity. A higher ROE typically indicates greater profitability. For insurance shoppers, ROE is one way to check whether an insurer can back up the policies it sells, and it is one of the figures looked at when ranking the best life insurance companies.

Insuranceopedia Explains Return On Equity

Return on Equity (ROE) is calculated by dividing a company’s net income by its shareholders’ equity. For example, a company with $5,000,000 in net income and $10,000,000 in shareholders’ equity would have an ROE of 50% ($5,000,000 ÷ $10,000,000 = 0.5). This means that for every dollar invested, the company generates a profit of fifty cents.

While a high ROE is generally a positive indicator, certain factors can artificially inflate it. Debt is a key example. A high ROE driven by substantial debt is not favorable, as taking on debt reduces shareholders’ equity and may mask underlying financial issues.