1. What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio that measures a company's profitability in relation to shareholder's equity. It shows how effectively management is using a company's assets to create profits.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

• \( \text{Net Income} \) — Company's total earnings after expenses and taxes
• \( \text{Shareholder's Equity} \) — Total assets minus total liabilities

Example: If a company has $10,000 net income and $50,000 shareholder equity, ROE = (10000 / 50000) * 100 = 20%

3. Importance of ROE Calculation

Details: ROE is a key metric for investors to assess a company's profitability and efficiency in generating returns on shareholder investment. Higher ROE generally indicates more efficient management.

4. Using the Calculator

Tips: Enter net income and shareholder's equity in the same currency units. Both values must be positive, with equity greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: Generally, ROE above 15% is considered good, but this varies by industry. Compare with industry averages for better context.

Q2: Can ROE be too high?
A: Exceptionally high ROE might indicate excessive leverage (debt) rather than operational efficiency. It's important to analyze alongside other financial metrics.

Q3: How does ROE differ from ROI?
A: ROI measures return on investment regardless of funding source, while ROE specifically measures return on shareholders' equity investment.

Q4: Should ROE be used alone for investment decisions?
A: No, ROE should be used with other financial ratios and qualitative factors for comprehensive investment analysis.

Q5: How often should ROE be calculated?
A: ROE should be calculated for each financial reporting period (quarterly, annually) to track performance trends over time.