Return on Equity is a financial performance metric that takes a company's Net Income and divides it by Shareholder's equity. This metric is used to gauge a company's profitability and efficiency in earning profits.


ROE = Net Income / Shareholder EquityROE is expressed as a percentage or ratio. Suppose a company's net income is $1.2 million, its preferred dividends are $200,000 and shareholder's equity is $10 million. The first step in ROE calculation is to subtract preferred dividends from the net income:$1.2 million – $200,000 = $1 millionFurther: $1 million / $10 million = 10%ROE of 10% means that for $1 of shareholder equity, the company makes $10 of net income. In effect, this means, that the company's shareholders will earn a 10% return on investment.

Why it matters

Investors look at ROE before investing in a company. It is also used to compare companies. A higher ROE means that the company is earning more in net profits against the equity investments it receives from shareholders. A company should aim to increase its ROE over time as it is considered a positive value add for shareholders.

Get Started

Ready to see Vareto in action?

Give your finance team the tools they deserve so your company can make better, faster operational decisions.

Request a demo