Notification
No new Notification messages
Swiggy IPO is Open!
Apply for the Swiggy IPO through UPI in just minutes.
Q2 FY'24-25 Results of Top Companies
Reliance, TCS, HDFC Bank & more: Explore key financial highlights from India's top quarterly results.
Open a Free Demat Account
Pay ZERO maintenance charges for the first year, get free stock picks daily, and more.
Diwali Offer: MTF at just 9.99%
Iss Diwali, Investments Ko Karo 4X with our Trade Now, Pay Later (MTF) feature
Track Market Movers Instantly
Stay updated with real-time data. Get insights at your fingertips.

What is Return on Equity (ROE)

Listen to our Podcast: Grow your wealth and keep it secure.

0:00 / 0:00

Return on Equity (ROE) signifies how a company generates returns on the investment received from its shareholder. ROE is implemented to determine the company’s working efficiency. It portrays the utilization of assets and financial leverage to upscale the business. Investors consider ROE as a key factor when deciding where to invest their money to make informed decisions confidently.

Mathematically speaking,

Return on Equity = Net Income or Profits / Shareholder’s Equity

This critical financial ratio measures how effectively shareholders' equity has been converted into profits - giving savvy investors a vital tool to decide where to put their money.

ROE measures how efficiently a company utilizes the money it receives from investors or shareholders.

What Is Return on Equity (ROE)?

The formula for calculating ROE is:

Net Income / Total Shareholders' Equity = Return on Equity (ROE).

To gain a better grasp of this concept, let's explore an example.

If Company A had Rs. 100,000 in net income and Rs. 800,000 in total shareholders' equity, their return on equity would be 12.5%. (100,000 / 800,000 = 0.125 or 12.5%)

Why Is ROE So Crucial To Investors?

Return on equity (ROE) is an important indicator of how well the company's management uses its investors' money to generate profits. Companies with higher ROEs are generally seen as more profitable investments than companies with lower ROEs because they have efficiently utilized their resources to yield greater shareholder returns.

For this reason, many investors prefer to invest in companies with a high Return on Equity ratio as they believe these companies are better managed than those with low ratios. ROE may also be used to predict a company's future potential returns since it can show how well the current management team is utilizing available resources to generate profits.

It can also help investors make decisions when considering investing in different companies within the same industry.

What are some examples of companies with high or low ROEs, and what can we learn from them?

One example of a company with a high return on equity is Apple Inc., which had an ROE of 175.46%in Jan 2023*. This is primarily because of the company's strong capital structure, which includes low debt and high cash reserves, resulting in improved profitability. On the other hand, Uber Technologies had a negative return on equity of -81.7% in the period*.

By studying companies with different ROE levels, we can have a glimpse of how businesses manage their capital structure.

How does ROE compare to other metrics, such as return on assets (ROA)?

ROE and ROA are two powerful metrics that measure a company's profitability, but they differ in how debt is evaluated. When no lending is involved, both ratios reflect equal levels of shareholder equity to total assets - hence having similar outcomes.

However, when financial leverage comes into play by increasing its asset base with borrowed funds - a contrasting result occurs where ROE remains unaffected. At the same time, ROA decreases due to additional liabilities listed on the balance sheet.

Here's an example to understand the difference between ROE and ROA - consider a company with Rs.100 crores of shareholder equity, Rs. 50 crores of borrowed funds, and total assets valued at Rs.150 crore.

In this case, the ROE and ROA would be 67% and 33%, respectively.

Conclusion

If you're looking for a reliable, comprehensive metric to track the profitability of high-leverage companies, ROE is preferable bet. Bajaj Broking. offers demat account with various subscription packs that helps you save big on brokerage. Contact us today to get started!

Share this article: 

investment-card-icon

What is Intraday Trading? Benefits, Types & Advantages

Learn about intraday trading, its benefits, various types, and advantages. Understand how to leverage this strategy for potential profits in the stock market.

investment-card-icon

Muhurat Trading 2024: Everything You Should Know

Celebrate Diwali with Muhurat Trading 2024! Join the one-hour trading window on November 1, 2024 and invest during the auspicious time with 0* brokerage fee.

investment-card-icon

200 Day Moving Average: How it Works

Gain insights into how the 200 Day Moving Average can help traders make informed investment decisions and filter out fundamentally strong securities.

investment-card-icon

What is Equity Delivery

Equity delivery involves buying stocks to hold for the long term. Discover its benefits, charges, and tips for effective investing with Bajaj Broking.

investment-card-icon

Shares vs Stocks | Difference Between Shares and Stocks

Difference Between Shares and Stocks: Unlock the basics of stocks vs. shares with our easy guide for new investors. Navigate the financial markets confidently!

investment-card-icon

What is Online Trading: Meaning, Benefits & its Working

Explore the benefits of online trading and gain insights into its cost structure, risk management strategies, and the difference between online and offline trading.

investment-card-icon

Momentum Trading

Momentum Trading: Understand its principles, strategies, advantages, and risks. Learn how to ride the waves of stock price movements.

investment-card-icon

How to start trading online

Explore in-depth insights on How to start trading online in our Knowledge Centre. Stay informed with expert analysis, tips, and guidance.

investment-card-icon

What is Trading Account: Definition, Types & Benefits

Get started in the stock market with a trading account. Learn about what is trading account, why it’s important, & how to make your own account quickly and easily

investment-card-icon

Exchange Traded Funds (ETF) - Meaning And How Do They Work?

Trading accounts facilitate market access, enabling buying, selling, and managing of shares for investment growth, trading and diversification.

Our Secure Trading Platforms

Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading

Bajaj Broking App Download

8 Lacs + Users

icon-with-text

4.8+ App Rating

icon-with-text

4 Languages

icon-with-text

₹5000+ Cr MTF Book

icon-with-text