Return on Equity, popular “ROE” is a financial indicator used to measure a company's profitability and efficiency in generating profits from the equity it has invested.
ROE indicates how much profit a company has generated in relation to the amount of shareholder equity. It is expressed as a percentage and is calculated by dividing a company's net income by its average shareholder equity during a specific period of time.
A high ROE indicates that a company is generating a strong return on the equity invested by its shareholders, while a low ROE suggests that a company is not generating enough profit relative to the amount of equity invested.
ROE can be used to compare the performance of companies within the same industry or sector.
For the fiscal year ended December 31, 2021, Company XYZ reported net income of $255 million and had an average shareholder equity of $8.3 billion.
To calculate XYZ's ROE for that year, we can use the following formula:
ROE = Net Income / Average Shareholder Equity
ROE = $255 million / $8.3 billion
ROE = 3.07%
So, XYZ Company had an ROE of 3.07% for the fiscal year 2021. This means that for every dollar of equity invested by its shareholders, XYZ generated a return of 3.07 cents in net income.
It's worth noting that ROE can vary widely depending on the industry and company size, so it's important to compare ROE with other companies in the same industry or sector to gain a better understanding of a company's performance.