Return on Equity Definition
Written by True Tamplin, BSc, CEPF®
Updated on March 30, 2021
Define ROE In Simple Terms
Because shareholder equity is equal to a business’s assets minus its debts, ROE can also be considered the return on net assets.
ROE, therefore, is sometimes used to estimate how efficiently a company’s management is able to generate profit with the assets they have available.
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Return on equity is calculated as follows:
For example, say that two competing stores both earn $100 million in income over a period.
Store A has $200 million in equity, whereas Store B has $500 million.
Store A’s ROE would be 50%, and Store B’s would be 20%.
Store A has managed to earn the same income with less equity, leading to a higher ROE.
This may indicate that Store A is better managed than Store B, and thus would be a better investment.
However, prudent investors will also take many other factors into consideration, such as earnings per share, return on invested capital, and return on total assets, before deciding to invest.