1. What is Return on Equity?

Return on Equity (ROE) is a financial ratio that 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.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

• \( Net\ Income \) — Company's total earnings after expenses and taxes (USD)
• \( Shareholders'\ Equity \) — Total assets minus total liabilities (USD)

Explanation: ROE shows how effectively management is using equity financing to grow the business. Higher ROE indicates more efficient use of equity capital.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors to assess a company's profitability and compare it with peers. It helps evaluate management's efficiency at generating profits from shareholders' investments.

4. Using the Calculator

Tips: Enter net income and shareholders' equity in USD. Both values must be positive, and equity cannot be zero. The result shows both percentage and decimal formats.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: Generally, ROE between 15-20% is considered good, but this varies by industry. Compare with industry averages for meaningful analysis.

Q2: Can ROE be negative?
A: Yes, if net income is negative (company is losing money) while equity is positive. Negative ROE indicates poor financial performance.

Q3: How often should ROE be calculated?
A: Typically calculated quarterly with financial statements, but annual ROE is most meaningful for long-term analysis.

Q4: What are limitations of ROE?
A: ROE can be artificially inflated by high debt levels (financial leverage) and doesn't account for risk. Should be used with other metrics.

Q5: What's the difference between ROE and ROI?
A: ROE measures return on shareholders' equity specifically, while ROI (Return on Investment) can measure return on any type of investment.