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RETURN ON EQUITY

Return on common Equity (ROE, Return on average common equity) - earnings before extraordinary items, less preferred-share dividends, divided by average common shareholders' equity. Shows the rate of return on the investment for the company's common shareholders, the only providers of capital who do not have a fixed return.

ROE=\frac{Net\ income}{Sales}\times\frac{Sales}{Total\ Assets}\times\frac{Total\ Assets}{Average\ stockholders\ equity}

=\frac{Net\ income}{Average\ stockholders\ equity}

(profit margin times total asset turnover times financial leverage, DuPont ratio)


ROE can be seen as a measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by total equity, expressed as a percentage.

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