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Finance Dictionary and Glossary of Investment Terms
Return on equity (ROE)
Definition 1.
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).
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Definition 2.
The latest 12 months'' net income divided by the most recent quarter common stock equity. Return on equity is probably the most widely used measure of how well a company is performing for its shareholders. It''s a relatively straightforward benchmark that is easy to calculate, works for the great majority of industries, and allows investors to compare the company''s use of its equity with other investments. Return on equity for most companies certainly should be in the double digits, and value investors often look for 15 percent or higher. A return of more than 20 percent is considered excellent. But the importance of consistency makes the five-year average, also given here, especially noteworthy.
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