Return on equity

ROE is a profitability ratio that measures how profitable a company is relative to its equity capital. The assets of a company comprise debt and equity. Both types of financing are used to finance the operations of a company. This ratio focuses on the return on the equity component of a company’s financing. It measures the rate of return of shareholders, and thus a firm’s efficiency at generating profits from every unit of shareholder’s equity.

ROE = (Net income) / (shareholder equity)

As with other financial ratios, the ROE of companies varies across industries. Thus it is more relevant to compare the ROEs of companies in the same industry.