Return On Equity -
The amount of net income
before dividend payments
(both preferred and
common dividends) as a
percentage of
shareholders equity
(Both preferred and
common shareholders).
Return on equity
measures a corporation's
profitability by
revealing how much
profit a company
generates with the money
shareholders have
invested.
ROE is expressed as a
percentage and
calculated as:
Return on Equity = Net
Income/Shareholder's
Equity
Some industries have
high ROE because they
require no assets, such
as service firms. Other
industries require large
infrastructure builds
and generally have a low
ROE. Generally,
capital-intensive
businesses have high
barriers to entry, which
limit competition. But
high-ROE firms with
small asset bases have
lower barriers to entry.
As with many financial
ratios, ROE is best used
to compare companies in
the same industry.
