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.
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.