Return on Equity (ROE)

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The Economic Times  Jul 16  Comment 
"So in the next three years or so, we expect Federal Bank to clock return on equities of 16-17 per cent which would uncap the price multiple."
SeekingAlpha  Jun 27  Comment 
By Kapitall: When it comes to investing, context is everything. A company's $1 billion quarterly profit may seem great because a billion dollars is a lot of money. But if the company in question made a $20 billion profit the year before, that...
The Economic Times  Jun 23  Comment 
Meena should not expect to earn a steady return every year — and be prepared for market volatility, which tends to average out over time.
Benzinga  Jun 18  Comment 
In a report published Wednesday, Morgan Stanley analyst Rajeev Lalwani reiterated an Overweight rating and $44.00 price target on ITC Holdings (NYSE: ITC). In the report, Morgan Stanley noted, “The forum through which FERC addresses the ROE...
OilVoice  May 30  Comment 
Wentworth Resources Limited the Oslo Stock Exchange OSE WRL and London Stock Exchange AIM WRL listed independent East Africafocused oil gas company announces the appointment of Katherine R
Reuters  May 26  Comment 
A new Japanese investment fund is set to join a small but growing band of "friendly" activists, shunning hostile tactics that have previously failed to generate change and...
Benzinga  May 21  Comment 
Below are the top drugs-generic stocks on the NASDAQ in terms of return on equity. The trailing-twelve-month return on equity at Adamas Pharmaceuticals (NASDAQ: ADMS) is 333.80%. Adamas Pharma's revenue for the same period is $71.10...
DailyFinance  May 20  Comment 
Aspen Insurance Holdings Limited (“Aspen”) (NYSE:AHL) issued today an investor presentation detailing the strong progress the Company has made on its growth strategy and path for delivering further growth in operating...
Benzinga  May 20  Comment 
In a report published Tuesday, Deutsche Bank analyst David Ho initiated coverage on Ally Financial (NYSE: ALLY) with a Hold rating and $26.00 price target. In the report, Deutsche Bank noted, “Ally Financial represents an interesting ROE...




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Return on Equity equals net income divided by average equity over a given period

Return on Equity is a measure of how profitably a company employs its equity, that is, the money raised from shareholders. Everything else being equal, a higher ROE is better as it means that the company is efficient about using its equity.


ROE = Net Income ÷ (Average Equity during the period)


Due to the unique nature of each industry and variances in accounting methodologies among them, ROE should normally be used for comparisons within the same industry. For example: The ROE for service-oriented industries, such as the software industry, is significantly higher than that of capital-intensive industries such as the construction industry.

Comparisons of ROE within the same industry can also be misleading as ROE ignores the effect of debt. If a company can issue debt at a lower interest rate than the rate of return on its investments, it could increase its ROE. However, higher debt also increases the risk of failure for the company. Generally, companies with higher debt, as measured by the debt to equity ratio, will have better ROE. An investor could get a better sense of the investment by considering the Return on Assets, which mitigates the influence of debt, alongwith ROE.

Determination of ROE

What are the drivers of ROE? The DuPont Analysis breaks the Return on Equity into three parts that are drivers: net profit margin, asset turnover and leverage.

ROE = (Net profits/Sales) * (Sales/Assets) * (Assets/Equity) = Net profits / Equity

ROE can also be broken down in a two-part equation, similar to the DuPont Analysis, using ROA (Net profits / Assets) and leverage.

ROE = (Net profits / Assets) * (Assets / Equity) = Net profits / Equity

Example

  • Company A earned $5 million in net income. Its equity capital in the beginning of the year were $10 million, and at the end of the year were $20 million. Therefore, the company's ROE during the year was 33% [($5 million)/(($10m + $20m)/2)].
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