dividendROEshareholders' equity

Very important financial ratio: Return on equity…

Return on equity.
Return on equity (ROE) measures how much a company earns within a specific period in relation to the amount that’s invested in its common stock.

It is calculated by dividing the company’s net income before common stock dividends are paid by the company’s net worth, which is the stockholders’ equity.
If the ROE is higher than the company’s return on assets, it may be a sign that management is using leverage to increase profits and profit margins.
In general, it’s considered a sign of good management when a company’s performance over time is at least as good as the average return on equity for other companies in the same industry.

Some important points :

  • If new shares are issued then use the weighted average of the number of shares throughout the year.
  • For high growth companies you should expect a higher ROE.
  • Averaging ROE over the past 5 to 10 years can give you a better idea of the historical growth.
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