252:
273:
to understand changes in ROE over time. For example, if the net margin increases, every sale brings in more money, resulting in a higher overall ROE. Similarly, if the asset turnover increases, the firm generates more sales for every unit of assets owned, again resulting in a higher overall ROE.
290:, but dividend payments to shareholders are not. Thus, a higher proportion of debt in the firm's capital structure leads to higher ROE. Financial leverage benefits diminish as the risk of defaulting on interest payments increases. If the firm takes on too much debt, the
178:
78:
dividends), divided by total equity (excluding preferred shares), expressed as a percentage. Because shareholder's equity can be calculated by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on
121:. Note though that, while higher ROE ought intuitively to imply higher stock prices, in reality, predicting the stock value of a company based on its ROE is dependent on too many other factors to be of use by itself.
247:{\displaystyle \mathrm {ROE} ={\frac {\mbox{Net income}}{\mbox{Sales}}}\times {\frac {\mbox{Sales}}{\mbox{Total Assets}}}\times {\frac {\mbox{Total Assets}}{\mbox{Shareholder Equity}}}}
450:
294:
rises as creditors demand a higher risk premium, and ROE decreases. Increased debt will make a positive contribution to a firm's ROE only if the matching
312:
110:, a ROE is a measure of management's ability to generate income from the equity available to it. ROEs of 15–20% are generally considered good.
339:, as, "in order to satisfy investors, a company should be able to generate a higher ROE than the return available from a lower risk investment".
596:
332:
571:
354:
311:. Here, analysts will compare the current sources of ROE against the company's history and its competitors, and thereby better
316:
676:
522:
510:
534:
143:
433:
747:
807:
564:
152:, also known as the strategic profit model, is a framework allowing management to decompose ROE into three
538:
729:
371:
100:
802:
741:
557:
688:
324:
169:
775:
331:
valuation result. Relatedly, this analysis allows management to preempt any underperformance vs
328:
96:
106:
ROE is especially used for comparing the performance of companies in the same industry. As with
139:
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682:
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717:
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475:
8:
654:
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753:
723:
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518:
377:
270:
161:
107:
711:
665:
359:
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279:
149:
32:
580:
389:
365:
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133:
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80:
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165:
796:
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28:
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479:
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418:
291:
75:
491:
Woolridge, J. Randall and Gray, Gary; Applied
Principles of Finance (2006)
269:
Splitting return on equity into the three components, makes it easier for
660:
451:"Beware: Weak Link Between Return On Equity And High Stock Price Returns"
336:
95:
ROE measures how many dollars of profit are generated for each dollar of
63:
67:
274:
Finally, increasing accounting leverage means that the firm uses more
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648:
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Identifying the sources of ROE in this fashion similarly allows
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of value. In particular, as mentioned, ROE is used developing
608:
449:
Rotblut, Charles; Investing, Intelligent (January 18, 2013).
275:
160:
of operations, asset usage, and finance. ROE is then the
298:(ROA) of that debt exceeds the interest rate on the debt.
307:
a better knowledge of the company and how it should be
415:"Return on Equity (ROE) Calculation and What It Means"
237:
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220:
215:
203:
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181:
246:
144:Financial risk management § Corporate finance
794:
448:
434:Profitability Indicator Ratios: Return On Equity
156:components; these "drivers of value" being the
511:Shareholder Value, ROE, and Cash Flow Analyses
565:
515:Financial Accounting in an Economic Context
513:in: Jamie Pratt and Michael Peters (2016).
257:The application, in the main, is either to
101:of how well the company utilizes its equity
572:
558:
409:
407:
405:
355:List of business and finance abbreviations
323:. These then feed, respectively, into the
16:Measure of the profitability of a business
335:, which could then lead to a decline in
468:
428:
426:
402:
795:
677:Present value of growth opportunities
597:Cyclically adjusted price-to-earnings
553:
127:
643:Enterprise value/gross cash invested
579:
423:
319:, and hence the growth rate of its
140:DuPont analysis § ROE analysis
13:
500:Bodie, Kane, Markus, "Investments"
317:estimates of a stock’s growth rate
189:
186:
183:
124:Both of these are expanded below.
14:
819:
282:financing. Interest payments to
31:of a business in relation to its
748:Risk-adjusted return on capital
517:(10th Edition). Wiley Finance.
527:
503:
494:
485:
442:
1:
333:shareholders' required return
609:Cash return on cash invested
117:, in association with other
52:Average Shareholders' Equity
7:
539:Corporate Finance Institute
343:
10:
824:
730:Return on capital employed
474:Marshall Hargrave (2022).
372:Return on capital employed
327:calculation, and / or the
137:
131:
742:Return on tangible equity
587:
695:Price-earnings to growth
395:
113:ROE is also a factor in
90:
62:Thus, ROE is equal to a
637:Enterprise value/EBITDA
509:See discussion under §
413:Jason Fernando (2023).
329:dividend discount model
99:, and is thus a metric
85:assets less liabilities
649:Enterprise value/sales
313:understand the drivers
278:financing relative to
248:
27:) is a measure of the
808:Investment indicators
249:
138:Further information:
103:to generate profits.
718:Return on net assets
384:Return on net assets
259:financial management
179:
97:shareholder's equity
603:Capitalization rate
305:investment analysts
170:accounting leverage
776:Sustainable growth
271:financial managers
244:
241:
239:Shareholder Equity
236:
224:
219:
207:
202:
128:The DuPont formula
74:dividends, before
790:
789:
724:Return on capital
592:Buffett indicator
523:978-1-119-30616-0
378:Return on capital
242:
240:
235:
225:
223:
218:
208:
206:
201:
162:net profit margin
108:return on capital
815:
803:Financial ratios
736:Return on equity
712:Return on assets
666:Operating margin
581:Financial ratios
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567:
560:
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535:Return on Equity
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360:Return on assets
296:return on assets
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119:financial ratios
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21:return on equity
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683:Price/cash flow
626:Dividend payout
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476:Dupont Analysis
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390:Leverage effect
366:Return on brand
350:DuPont analysis
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263:fund management
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134:DuPont analysis
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115:stock valuation
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72:preferred stock
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765:Short interest
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689:Price-earnings
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652:
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640:
634:
631:Earnings yield
628:
623:
621:Dividend cover
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615:Debt-to-equity
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533:Staff (2023).
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325:terminal value
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288:tax-deductible
255:
254:
229:
212:
195:
191:
188:
185:
168:multiplied by
166:asset turnover
164:multiplied by
150:DuPont formula
132:Main article:
129:
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60:
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15:
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3:
2:
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707:Profit margin
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671:Price-to-book
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655:Loan-to-value
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432:Richard Loth
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29:profitability
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480:Investopedia
470:
458:. Retrieved
454:
444:
438:Investopedia
419:Investopedia
292:cost of debt
256:
234:Total Assets
222:Total Assets
153:
147:
123:
112:
105:
94:
84:
76:common stock
61:
24:
20:
18:
754:Risk return
701:Price-sales
639:(EV/EBITDA)
460:November 4,
337:share price
64:fiscal year
797:Categories
651:(EV/Sales)
605:(Cap Rate)
200:Net income
158:efficiency
154:actionable
68:net income
46:Net Income
35:; where:
321:dividends
284:creditors
228:×
211:×
645:(EV/GCI)
344:See also
782:Treynor
771:Sortino
750:(RAROC)
611:(CROCI)
70:(after
55:
43:
760:Sharpe
744:(ROTE)
732:(ROCE)
720:(RONA)
685:(P/CF)
679:(PVGO)
599:(CAPE)
521:
455:Forbes
386:(RoNA)
374:(ROCE)
309:valued
280:equity
261:or to
142:, and
40:ROE =
33:equity
778:(SGR)
767:(SIR)
756:(RRR)
738:(ROE)
726:(ROC)
714:(ROA)
703:(P/S)
697:(PEG)
691:(P/E)
673:(P/B)
661:Omega
657:(LTV)
633:(E/P)
617:(D/E)
396:Notes
380:(RoC)
368:(ROB)
362:(RoA)
217:Sales
205:Sales
91:Usage
83:, or
519:ISBN
462:2018
286:are
276:debt
148:The
19:The
436:",
81:NAV
66:'s
25:ROE
799::
537:.
478:,
453:.
425:^
417:,
404:^
265::
172::
87:.
573:e
566:t
559:v
482:.
464:.
194:=
190:E
187:O
184:R
49:/
23:(
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