1. What is Return On Common Stockholder Equity Ratio?

The Return On Equity (ROE) ratio measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It's expressed as a percentage (or decimal) and 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:

• \( Net\ Income \) — The company's total earnings or profit (after taxes)
• \( Shareholder's\ Equity \) — Total assets minus total liabilities

Explanation: The ratio indicates how well a company uses investment dollars to generate earnings growth. Higher values generally indicate more efficient use of equity.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors as it shows whether a company is growing without requiring additional capital. It's used to compare profitability between companies in the same industry.

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 ratio?
A: While it varies by industry, generally an ROE of 15-20% is considered good. However, very high ROE might indicate excessive debt.

Q2: How does ROE differ from ROI?
A: ROE measures return specifically on shareholders' equity, while ROI (Return on Investment) measures return on any form of investment.

Q3: Can ROE be negative?
A: Yes, if net income is negative (the company is losing money), ROE will be negative.

Q4: What are limitations of ROE?
A: ROE can be artificially inflated by high debt levels (financial leverage) and doesn't account for asset depreciation.

Q5: How often should ROE be calculated?
A: Typically calculated quarterly with financial statements, but annual ROE gives a better picture of long-term performance.