ROE (Return on Equity)
ROE measures what percentage of profit a company generates for every euro of capital contributed by its shareholders, and it's one of the most-used indicators to assess a company's efficiency.
ROE (Return on Equity) is calculated by dividing a company's net profit by its shareholders' equity (the capital contributed by shareholders plus retained earnings). A ROE of 15%, for example, means the company generates 15 cents of net profit for every euro of equity invested in the business, over a year.
A high ROE is usually seen as a sign that a company uses shareholders' capital efficiently to generate profit, but it's worth comparing it with companies in the same sector, since a "normal" ROE varies a lot by business type. A very high ROE can also be partly driven by heavy debt (less equity in the denominator), so it's usually analyzed alongside the company's debt level.
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Frequently asked questions
How is ROE calculated?
By dividing the company's net profit by its shareholders' equity, expressed as a percentage.
What's considered a good ROE?
It depends heavily on the sector: what matters is comparing a company's ROE with its direct competitors, not against a fixed threshold that applies to any industry.
Is a high ROE always positive?
Not always: a very high ROE can be partly driven by heavy debt (which reduces equity in the denominator), which also increases the company's financial risk. It's worth checking alongside the debt level.