What is Return on Equity, how do you calculate it, and why is it Important?
One of the most powerful ratios you can calculate is the profitability ratio Return On Equity (ROE). Its primary function is to tell you the expected return on investment for investors. However, using a few other analytical methods it can reveal far more information about how well the company is being managed and performing. In this article, we will answer the following:
1. What is Return on Equity?
2. How do you calculate return on equity?
3. How do you calculate future growth rate using ROE?
4. What are the drawbacks of Return on Equity?
1. What is Return on Equity?
Return on Equity calculates how much money is made based on the investors’ investment in the company. Investors want to see a high return on equity ratio because this indicates that the company is using its investors’ funds effectively. Since Assets = Liabilities + Equity , ROE gives deeper insight into specifically how well the company generates profit in comparison to the value of the equity held; ROE is also considered the return on net assets because Equity = Assets — Liabilities.
Return on assets is often considered a two-part ratio because it brings together the income…
