What is ROE?

 In this blog, I will be answering the following questions -

• What is Return On Equity (ROE)?
• How is it calculated?
• What is the ROE of a good company?
• How should we use it?

| What is Return On Equity (ROE)?

ROE is a profitability ratio which tells that how much money a company is making by shareholder equity. Now let's see how it is calculated.

| How is ROE calculated?

The formula to calculate ROCE is : Net Profit / Average Shareholders equity. Net profit, also known as net income comes from the income statement of the company whereas the shareholders equity comes from the balance sheet. Example : If we talk about the company 'Prince Pipes', the company's net profit from the financial year 2020 is 113 crore rupees. The company's average shareholders equity is (Average Shareholders Equity + Closing Shareholders Equity) / 2 = (838 Cr. + 398 Cr.) / 2 = 618 Cr. Rupees. Like this, ROE = 113Cr. / 618Cr. = 18.3%.

| What is the ROE of a good company?

The ROE of a good company should at least be 15%. If we want to invest for long term in a company, we should only invest in those companies whose ROE is above 15%. While investing, we should check the ROE of the company of the past 4-5 financial years. We should not only go on ROE while investing in a company, because a company can increase it's ROE by taking debt too. 

| How should we use ROE?

ROE is a very important ratio for analyzing a company, and we should check the ROE for the past 10 years along with the current ROE of the company. We could access all of this information from the Annual report of the company. We only get high profit in the stock market only if we invest in companies which are financially strong, and have increased their profit year by year.

That's it. Thank you for reading the blog. Please comment your feedback down below.