What is return on equity (ROE)?

What is 'Return on Equity (ROE)'. Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE could be thought of as the return on net assets.

What is a good return on equity?

A common shortcut for investors is to consider a return on equity near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor. Using ROE to estimate growth rates

What is the return on equity formula?

While the simple return on equity formula is net income divided by shareholder’s equity, we can break it down further into additional drivers. As you can see in the diagram below, the return on equity formula is also a function of a firm’s return on assets (ROA) and the amount of financial leverage it has.

Why is the return on equity ratio skewed?

The return on equity ratio can also be skewed by share buybacks. When management repurchases its shares from the marketplace, this reduces the number of outstanding shares. Thus, ROE increases as the denominator shrinks. Another weakness is that some ROE ratios may exclude intangible assets from shareholders’ equity.