UK Accounting Glossary
ROE is an abbreviation for return on equity, which is a measure of a company’s profitability. Essentially, ROE reveals the profit a company generates using the money that shareholders have invested in the company. ROE lets investors know how well their money is being utilized. ROE can be computed by taking a company’s net income for a given period and dividing it by shareholder’s equity. In addition, ROE may also be calculated by dividing net income by average shareholders’ equity (shareholders’ equity at the beginning of a period plus shareholders’ equity at the end of a period divided by two). ROE is a useful tool for comparing the profitability of a company with others in the same industry. Growth investors tend to lean towards a company that has a high and growing ROE. A company that shows repeatedly poor ROE figures is likely to be struggling.
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This glossary post was last updated: 6th February 2020.