Return on equity (ROE)

Return on equity Formula

What is the return on equity and, what does it tell you?

The return on equity can calculate by dividing the net income of the company by its shareholder's equity.

The return on equity can use to analyze the financial performance of a company.

What does it mean by a higher return on equity?

Investors might like to add a company to their watch list if the ROI is equal to or slightly higher than the industry average.

What does it mean by a lower return on equity?

A company with a lower return on equity compared to its industry average may indicate that the company is making losses.

What does it mean by a negative return on equity?

A company with a negative return on equity may indicate that the company is making losses.

However, newly founded companies and startups may have a negative return on equity in the beginning. So if their business ideas and plans are good, they may be profitable in the long run. So, analyze business very wisely.

How to use return on equity?

Investors might like to add a company to their watch list if the ROI is equal to or slightly higher than the industry average.

If the ROI of a company is increasing with time(ROI is growing), investors can consider it as a great sign for a good investment opportunity.

Risk of using return on equity and when not to use return on equity

The ROI can be high due to the smaller shareholders' equity value. That may indicate that the company might have lots of debts or lesser assets.

So never take decisions by only looking at ROE. Always analyze as possible by considering different factors like other ratios and business news. Always try to use multiple ratios combinedly to get a more clear picture of a company.

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