Return on equity (ROE)
Financial Accounting glossary · Financial Statement Analysis & Ratios
Definition
Net income / average stockholders' equity; measures return generated on shareholders' invested capital.
Return on equity (ROE) in plain English
ROE answers one blunt question: for every dollar the owners put into a company, how many cents of profit did the company squeeze out this year? It's a report card on how well management uses the owners' money. You take net income (the year's profit after all expenses and taxes) and divide by the average amount of the owners' stake — so an ROE of 0.15, or 15%, means the business earned 15 cents of profit per dollar of owner money. Like judging a lemonade stand not by total profit but by profit compared to the cash you fronted it, a higher ROE usually means the money is working harder.
Also called: ROE
Learn these first
Related Financial Accounting terms
Financial Accounting practice questions · Financial Accounting flashcards · Financial Accounting study guide