How to Determine Return on Equity What is the most tangible proof that a company is worth holding for the long-term?
If you answered earnings, take a bow. Earning a profit is the goal of every company—or at least it should be (with not-for-profit organizations being an obvious exception). As a shareholder, or potential shareholder of a company, it should be in your best interest to know how much profit that company is generating with the money shareholders have invested in it. Return on equity (ROE) is a measure that can help investors in their search for lean, mean profit machines. Return on Equity Defined One of the key profitability metrics is return on equity. Return on equity measures how much profit a company is able to generate given the resources provided by its shareholders. ROE is calculated as follows: ROE = Net Income/Shareholder’s Equity Net income is a fancier way of saying profits, earnings or the bottom line. Shareholder’s equity is equal to a company’s total assets minus its total liabilities. Or, simply put, the amount of assets that are owned by a company’s shareholders. Net income
