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.

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.