Return on equity is one of the most popular ways for investors to assess the efficiency of a business before they buy a stock. Return on equity is a measure of profitability relative to shareholder’s equity.
Return on equity is calculated by dividing net income by the company’s assets minus its debt. In other words, return on equity is the ratio of net income to net assets.
Why Is It Important?
In practical terms, return on equity and return on assets are two different indicators of how well a company’s management is using its assets. Like ROA, ROE varies widely from industry to industry, but it’s a quick way to measure efficiency among a group of peers in the same business.
For example, if one auto company has an ROE that is half as high as a competitor, it may be a sign that management should consider restructuring the business or updating its assets. A low ROE could be a sign that a company needs to divest unproductive assets to counter a potentially bloated balance sheet….CLICK for complete article
