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Return on equity

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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
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ROE is especially used for comparing the performance of companies in the same industry. As with
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Woolridge, J. Randall and Gray, Gary; Applied Principles of Finance (2006)
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Splitting return on equity into the three components, makes it easier for
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ROE measures how many dollars of profit are generated for each dollar of
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Finally, increasing accounting leverage means that the firm uses more
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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
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Rotblut, Charles; Investing, Intelligent (January 18, 2013).
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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: 232: 220: 215: 203: 198: 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 574: 567: 560: 551: 550: 541: 535:Return on Equity 531: 525: 507: 501: 498: 492: 489: 483: 472: 466: 465: 463: 461: 446: 440: 430: 421: 411: 360:Return on assets 296:return on assets 253: 251: 250: 245: 243: 238: 233: 231: 226: 221: 216: 214: 209: 204: 199: 197: 192: 119:financial ratios 58: 57: 56: 54: 53: 50: 47: 21:return on equity 823: 822: 818: 817: 816: 814: 813: 812: 793: 792: 791: 786: 683:Price/cash flow 626:Dividend payout 583: 578: 547: 545: 544: 532: 528: 508: 504: 499: 495: 490: 486: 476:Dupont Analysis 473: 469: 459: 457: 447: 443: 431: 424: 412: 403: 398: 390:Leverage effect 366:Return on brand 350:DuPont analysis 346: 263:fund management 230: 213: 196: 182: 180: 177: 176: 146: 136: 134:DuPont analysis 130: 115:stock valuation 93: 72:preferred stock 51: 48: 45: 44: 42: 41: 39: 17: 12: 11: 5: 821: 811: 810: 805: 788: 787: 785: 784: 779: 773: 768: 765:Short interest 762: 757: 751: 745: 739: 733: 727: 721: 715: 709: 704: 698: 692: 689:Price-earnings 686: 680: 674: 668: 663: 658: 652: 646: 640: 634: 631:Earnings yield 628: 623: 621:Dividend cover 618: 615:Debt-to-equity 612: 606: 600: 594: 588: 585: 584: 577: 576: 569: 562: 554: 543: 542: 533:Staff (2023). 526: 502: 493: 484: 467: 441: 422: 400: 399: 397: 394: 393: 392: 387: 381: 375: 369: 363: 357: 352: 345: 342: 341: 340: 325:terminal value 300: 299: 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: 126: 92: 89: 60: 59: 15: 9: 6: 4: 3: 2: 820: 809: 806: 804: 801: 800: 798: 783: 780: 777: 774: 772: 769: 766: 763: 761: 758: 755: 752: 749: 746: 743: 740: 737: 734: 731: 728: 725: 722: 719: 716: 713: 710: 708: 707:Profit margin 705: 702: 699: 696: 693: 690: 687: 684: 681: 678: 675: 672: 671:Price-to-book 669: 667: 664: 662: 659: 656: 655:Loan-to-value 653: 650: 647: 644: 641: 638: 635: 632: 629: 627: 624: 622: 619: 616: 613: 610: 607: 604: 601: 598: 595: 593: 590: 589: 586: 582: 575: 570: 568: 563: 561: 556: 555: 552: 548: 540: 536: 530: 524: 520: 516: 512: 506: 497: 488: 481: 477: 471: 456: 452: 445: 439: 435: 432:Richard Loth 429: 427: 420: 416: 410: 408: 406: 401: 391: 388: 385: 382: 379: 376: 373: 370: 367: 364: 361: 358: 356: 353: 351: 348: 347: 338: 334: 330: 326: 322: 318: 314: 310: 306: 302: 301: 297: 293: 289: 285: 281: 277: 272: 268: 267: 266: 264: 260: 227: 210: 193: 175: 174: 173: 171: 167: 163: 159: 155: 151: 145: 141: 135: 125: 122: 120: 116: 111: 109: 104: 102: 98: 88: 86: 82: 77: 73: 69: 65: 38: 37: 36: 34: 30: 29:profitability 26: 22: 735: 546: 529: 514: 505: 496: 487: 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:(

Index

profitability
equity
fiscal year
net income
preferred stock
common stock
NAV
shareholder's equity
of how well the company utilizes its equity
return on capital
stock valuation
financial ratios
DuPont analysis
DuPont analysis § ROE analysis
Financial risk management § Corporate finance
DuPont formula
efficiency
net profit margin
asset turnover
accounting leverage
financial management
fund management
financial managers
debt
equity
creditors
tax-deductible
cost of debt
return on assets
investment analysts

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