ROE
Return on Equity shows how efficiently a company uses shareholder money to generate profit.
Start the lessonIntroduction
How much profit does equity create?
ROE stands for Return on Equity. It measures how efficiently a company turns the money invested by shareholders into profit. In simple words, it answers: for every ₹100 of equity, how much profit did the business make?
The short answer
A higher ROE often indicates better efficiency, but it must be compared with peer companies and checked for leverage or accounting distortions.
Formula
ROE = Net Profit ÷ Shareholder Equity × 100
Shareholder equity represents the owners' stake in the business after liabilities. ROE tells you the percentage return on that capital.
Example
₹30 lakh profit ÷ ₹200 lakh equity × 100 = 15% ROE
Quick example
Try the ROE formula
Net profit
₹30,00,000
ROE
15.00%
How to read it
Interpret ROE with context
Look at the trend
A rising ROE over several years may suggest improving efficiency, while a falling ROE may indicate weakening profitability or higher risk.
Compare with peers
Different businesses have different capital needs. Compare ROE with similar companies in the same industry.
Check leverage
A company can boost ROE by using more debt, so debt levels should be looked at alongside ROE.
Key points
ROE is useful, but not magic
- ROE compares profit to shareholder equity.
- It shows how well the company uses equity capital.
- A high ROE is not always better without context.
- Compare ROE across time and peer companies before judging it.
Test yourself
5-question quiz
Choose one answer for each question, then check your score.
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ROCE
See how efficiently a company uses capital employed in operations.