Return on Equity (ROE)

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Benzinga  Sep 30  Comment 
Below are the top small-cap property & casualty insurance stocks on the NYSE and the NASDAQ in terms of return on equity. The trailing-twelve-month return on equity at HCI Group (NYSE: HCI) is 55.90%. HCI Group's revenue for the same period is...
Benzinga  Sep 15  Comment 
Below are the top farm products stocks on the NYSE and the NASDAQ in terms of return on equity. The trailing-twelve-month return on equity at Pingtan Marine Enterprise (NASDAQ: PME) is 45.60%. Pingtan Marine Enterprise' revenue for the same...
SeekingAlpha  Sep 9  Comment 
By Jonathan Weber: Michael Kors (NYSE:KORS) is one of the fastest growing fashion companies in the world. In the last twelve months the company reported revenues of $3.6 billion and earnings of $724 million. The company has a market capitalization...
The Economic Times  Aug 4  Comment 
As a stock market investor, you will always be on the lookout for companies that consistently earn high profits and have the ability to do it using their existing resources.
The Economic Times  Jul 25  Comment 
These two measures tell how profitable a company is in terms of investments made in it or how efficiently it is using its resources.
The Economic Times  Jul 24  Comment 
These two measures tell how profitable a company is in terms of investments made in it or how efficiently it is using its resources.
SeekingAlpha  Jul 21  Comment 
By Portfolio Management 101: Return on equity can be an important metric to consider when evaluating companies for investment. In fact, the most successful investor of all time, Warren Buffett, considers it one of the most important factors to...
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...




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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 รท (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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