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Glossary

Return On Equity ROE

Fundamental Analysis

Return on Equity (ROE) is a financial ratio that measures how much profit a company generates relative to the amount of shareholder equity it possesses. It is calculated by dividing a company*s net income by its average shareholder equity over a period of time.

The formula for calculating ROE is:

ROE = Net income / Average shareholder equity

ROE is a key metric used in fundamental analysis, which is the process of evaluating a company*s financial health and performance. It is a measure of a company*s profitability and efficiency in using its shareholders* investments to generate income.

A high ROE implies that a company is generating a significant amount of profit relative to the equity invested by shareholders. This indicates that the company is utilizing its resources effectively and efficiently.

On the other hand, a low ROE indicates that a company may not be generating sufficient returns on its equity, which may be a sign of poor financial performance. A negative ROE indicates that the company is operating at a loss, which can be a warning sign to investors.

ROE is often used by investors and analysts as a benchmark for comparing the performance of one company against another in the same industry. It can also be used to track the performance of a company over time, to identify trends and patterns in its financial health.

Overall, ROE is a valuable tool in fundamental analysis, as it provides a clear indication of a company*s profitability and efficiency in generating returns for its shareholders.




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