Quick Summary
ROE shows how effectively a company uses shareholders' capital to generate profits.
Return on Equity (ROE) is a profitability ratio that measures how much profit a company generates with the money shareholders have invested. It is expressed as a percentage.
ROE Formula
ROE = (Net Income / Shareholders' Equity) × 100
Example
If a company has:
- Net Income (PAT): ₹50 lakhs
- Shareholders' Equity: ₹200 lakhs
Then ROE = (₹50 / ₹200) × 100 = 25%
DuPont Analysis
ROE can be broken down into three components:
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
- Profitability: Net Profit Margin (Net Income/Revenue)
- Efficiency: Asset Turnover (Revenue/Total Assets)
- Leverage: Equity Multiplier (Total Assets/Shareholders' Equity)
Interpretation
- Higher ROE indicates better use of equity capital
- Compare with industry benchmarks
- Sustainable ROE of 15-20%+ is generally good
- Very high ROE may indicate excessive leverage
Key Points
- Measures return on shareholders' investment
- Higher is generally better
- Compare against industry averages
- DuPont analysis provides deeper insights
- Sustainable ROE > 15% is desirable