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Return on Equity interpretation

Return on Equity (ROE) is an indicator of company's profitability by measuring how much profit the company generates with the money invested by common stock owners. It is also known as Return on Net Worth. Return on Equity formula is:

Return on Equity formula

Return on Equity shows how many dollars of earnings result from each dollar of equity.

Net income is considered for the full fiscal year after taxes and preferred stock dividends but before common stock dividends. Shareholders' Equity does not include preferred stocks and is used as an annual average.

Return on Equity varies substantially across different industries. Therefore, it is recommended to compare return on equity against company's previous values or return of a similar company.

Some industries have high return on equity because they require less capital invested. Other industries require large infrastructure build before generating any revenue. It is not a fair conclusion that the industries with a higher Return on Equity ratio are better investment than the lower ones. Generally, the industries which are capital-intensive and with a low return on equity have a limited competition. But, the industries with high return on equity and small assets bases have a much higher competition because it is a lot easier to start a business within those industries.

Return on Equity is one of the profitability ratios and is usually expressed as a percentage.

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