Return on equity (or ROE) is a financial ratio used to measure the profitability of common shareholder equity in a company, and is expressed as a percentage. ROE gives shareholders a sense of how well their money is being used to create profit, and is often referenced in the media and stock analyst reports. You can use ROE to compare profitability of different companies, ideally within the same industry.
At its simplest, ROE is calculated as:
Net income (revenue – expenses) / Shareholder equity
For example, if a company’s net income is $8 million and its shareholder equity is $50 million, its ROE is 16% (ROE = $8 million / $50 million).
Learn about some other indicators used to assess stocks.