Return On Equity
What is Return On Equity? Description
ROE is an accounting valuation method similar to Return on Investment (ROI). Return on Equity (ROE) is one measure of how efficiently a company uses its assets to produce earnings.
Because the numerator (Net Income) is an unreliable corporate performance measurement, the outcome of the formula for ROE must also be unreliable to determine success or corporate value.
However the formula still shows up in many annual reports.
Return on Equity overstates economic value
The degree to which ROE overstates the economic value depends on at least 5 factors.
On top of this, ROE is sensitive to leverage: because it assumes that proceeds from debt financing can be invested at a return greater than the borrowing rate, the ROE will increase with greater amounts of leverage.
Calculation of Return on Equity. Formula
Net Income / Book Value of Shareholders' Equity = ROE
Compare with Return on Equity: EBIT | EBITDA | Economic Value Added | Cash Ratio | Current Ratio | Earnings Per Share | Return on Invested Capital | Return on Invested Capital | P/E Ratio | PEG Ratio | Economic Margin | DuPont Model
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