5 smart things to know about return on equity

1. Return on Equity ( ROE) is a profitability measure that calculates how much profit a company has made on the money that the shareholders have invested.

2. ROE is expressed as a percentage and calculated by dividing profit after tax by shareholder’s equity.

3. ROE also measures the efficiency of a company, indicating how well the given company’s management is deploying the shareholders’ capital.

4. A rising ROE suggests that a company is increasing its ability to generate profit without needing additional capital.

5. Write downs, buybacks and a high level of debt reduce the value of the shareholders’ equity, which leads to an artificial increase in ROE.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)