Return on Equity (ROE)
Definition
Net profit as a percentage of shareholders' equity, showing how much profit a business generates from the owners' invested capital. A higher ROE indicates more efficient use of equity, though leverage can inflate it.
Formula
ROE = Net profit ÷ Shareholders' equity × 100
Related Terms in Financial Analysis
Return on Assets (ROA)
Net profit as a percentage of total assets, measuring how efficiently a business uses everything it owns to generate profit. It is useful for comparing asset-intensive businesses.
Return on Capital Employed (ROCE)
Operating profit as a percentage of capital employed (equity plus long-term debt), showing how well a business turns its total long-term funding into operating profit. It is widely used to compare capital efficiency.
Return on Investment (ROI)
The gain from an investment relative to its cost, expressed as a percentage. A simple, general-purpose measure for comparing the payoff of different investments or projects.
EBIT
Earnings Before Interest and Tax — a measure of operating profitability that strips out financing and tax effects. It is close to operating income and is used to compare the core performance of businesses with different capital structures.
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