ROE

ROE
return on equity (ROE)
A measure of the return realized by the owners of an enterprise. Calculated by dividing an enterprise's annualized net income by its average capital for the period. Alternatively, it can be calculated by multiplying the enterprise's ROA by its leverage/equity multiplier. ROE indicates how effectively the enterprise is using its capital to produce income. American Banker Glossary
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   Return on Equity.
   The ratio of a company's profit to its shareholders' equity, expressed as a percentage. It is the most widely used measure of how well management uses shareholders' funds.
   Its main advantage is that it is a benchmark that allows investors to compare the profitability of hugely differing industries. Investors do not care whether their holdings are in low-margin retailers or high-margin technology companies, as long as they produce an above-average ROE.
   Its main flaw is that it ignores the debt side of the company's funding and thus fails to measure the amount of risk involved in obtaining a given amount of earnings. A high ROE can be due to high earnings or low equity, therefore it is always wise to keep an eye on the company's leverage (as measured by its debt/equity ratio).
   ROE ratios for healthy companies range between 10 and 25 percent. Most investors look for companies with double-digit ROEs, or at least higher than the return on a risk-free investment such as a government bond. Companies earning high ROEs will typically attract competition into their market segment and need to keep growing and/or cutting costs to maintain double-digit ROE levels.
   Formula: Attributable Profit/Shareholders' Equity x 100 Example
   In the last complete financial year The Old Rope Corporation had attributable profit of £64 million and shareholders' equity of £300 million.
   ROE: 64/300 x 100 = 21.33 percent
   ► See also Assets, EPS, Shareholders' Funds.

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ROE UK US noun [U] FINANCE, ACCOUNTING
► ABBREVIATION for RETURN ON EQUITY(Cf. ↑return on equity)

Financial and business terms. 2012.

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