Return on Equity (ROE) - Meaning, Formula, Assumptions and Interpretation
Return on Equity (ROE) is probably the most important number in the financial universe. Every company is driven by profit and Return on Equity (ROE) is considered to be the best indicator of the profitability of a company. Debt holders just want to get their interest and principle back i.e. they will obtain a fixed rate of return. On the other hand equity holders get a variable return. For this reason, this number is considered more important than Return on Assets or Return On Invested Capital.
Return On Capital Invested = Profit After Tax (PAT) / Equity
Return on Equity (ROE) is one of the few ratios that uses after tax profits
Return on equity tells the shareholders how many dollars of post-tax earnings, the company generated for every dollar of equity capital it had.
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