A profitability measure that indicates how efficiently the company did invest and manage the stockholders’ equity. In view of the goal of maximizing shareholders’ wealth, companies focus on this measure of performance (the bottom line). Return on equity (ROE) is typically measured as:
For example, if the net income and total equity of a company are $50,000 and $330,000 respectively, then its return on equity (ROE) is:
ROE = 50,000 / 330,000 = 15.15%
As such, and in accounting terms (equity is measured at book value), the company is said to have generated more than 15 cents in profits for every dollar in “book” equity.
