Return on equity, or ROE, measures how efficiently a company generates profits from the money shareholders have invested. It is calculated by dividing net income by shareholder equity. A higher ROE suggests the company is using shareholder capital more effectively.
A company has $10 million in shareholder equity and generates $2 million in annual net income. Its ROE is 20 percent. This means the company is earning 20 cents in profit for every dollar of shareholder equity.
Greater Fool is a free Chrome extension that explains terms like this in place. Highlight a word on any page, click Explain, keep reading.
Add to Chrome (free)