Return on equity (ROE)

Last updated: 25.03.2016

Return on equity (ROE) is one of profitability indicators, which shows how effectively the entity manages resources invested by the shareholders/partners.

 

Calculation formula

 

 * can be in the form of average of the beginning and end of the period

The numerator is most often EAT (PAT), often after deduction of dividends to owners of preferred shares.

 

Comparison and recommended value

If the entity is financed only by equity, the ROE can be consistent with ROCE.

Comparison with other companies makes sense only within the same industry. It is appropriate to look to the trend development over a longer period of time.

Recommended value depends on many factors (e.g. industry or macro-economic developments), however, it should be over 12% in stable economies (11).

 

The main disadvantage of ROE

is that it does not take into account loans (or rather liabilities), so the reason for good ROE can also be higher indebtedness (especially in the case of cheaper loans). Because of this, ROE is mainly used by shareholders (it makes more sense to use ROCE internally) and debt ratios shall be analyzed parallel as well.



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1 = nejhorší, 10 = nejlepší

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