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Return On Equity (ROE)

What Does Return On Equity (ROE) Mean?

Return on Equity (ROE) is a percentage that reflects how much a company has earned if its net income is pitted against the money invested by its shareholders. A high percentage usually indicates that the company is highly profitable.

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Insuranceopedia Explains Return On Equity (ROE)

Return on Equity is calculated by dividing the company's net income by its shareholder's equity. To illustrate, a company with $5,000,000 in net income and $10,000,000 in shareholder's equity would have a 50% ROE (5,000,000 / 10,000,000 = 0.5). This means that for every dollar invested, the company has gained a fifty cent profit.

Although a high ROE tends to be a positive sign, there are some negative factors that can bloat it. Debt is one of them. A high ROE as a result of heavy debt is not a positive indicator since incurring a corporate debt also means that shareholder's equity has been reduced.

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