Return on Equity (ROE) – Explained

ROE measures how good the funds of share holders is utilised to generate profit. The formula to calculate ROE is,

ROE = (Net income) ÷ (Shareholders’ equity)

Net income is nothing but profit after tax. While shareholders’ equity is ‘Total Assets minus Total Liabilities’.

The ROE is different for different industries. Investors usually prefer a company with bigger ROE than its peers. Imagine there are two companies, Company A and Company B. Both companies have ₹100, company A makes a net profit of ₹15 using that ₹100, while company B makes a net profit of ₹10 using the same ₹100. We can say that company A is using the fund in a better way and is creating more money for investors than company B. ROE is expressed in terms of percentage.

Investors should take into account various other factors before picking a stock. In the above example we can see that Company A performed better than company B, and both had ₹100. But in real life companies tend to have different operating capital and the profits can be different, also the price of the stock may vary ( for example, TCS is more expensive than Infosys). So various other ratios too must be taken into consideration before picking a stock. Also it is believed that ROE can be tampered by taking loans when economy is doing good.

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Disclaimer : Trading stocks is subjected to market risks. Please read all the terms and conditions before investing. The motive of this post was to teach little things about stocks for those who do not understand much about stocks. will not hold any responsibility for any losses incurred to the readers of this post.