Return on Equity (ROE) Ratio serves as a vital metric in assessing a company’s financial health and its ability to utilize shareholders’ equity effectively for-profit generation.
The formula,
ROE = (Net Income / Shareholders’ Equity) * 100, unveils the percentage of net income derived from each rupee of shareholder equity.
For Example,
Suppose a company in India has a Net Income of ₹2,50,000 and Shareholders’ Equity of ₹8,50,000.
Return on Equity (ROE) Ratio = (₹2,50,000/₹8,50,000) * 100%
Return on Equity (ROE) Ratio = 29.4%
This signifies that, the Return on Equity (ROE) ratio for the company is 29.41%. This means that for every rupee of shareholders’ equity invested in the company, it generates approximately 29.41 paisa in net income.
Hence, ROE Ratio helps us figure out how well a company is using its investor’s money to make a profit. A higher ROE is usually good because it means the company is making more money with each rupee invested. But, it’s important to look at other numbers too, not just ROE, to get a complete picture. Investors use ROE to understand how likely a company is to grow and take risks. So, it’s like a helpful tool that gives us a peek into how smart a company is with its money, helping investors decide where to put their money.