Return on Equity (ROE) Explained Simply

Published by StockScore Editorial • Reading time: 4 mins

Return on Equity (ROE) is a performance metric that measures how much profit a company generates with the money shareholders have directly invested in it.

How is ROE calculated?

            ROE = Net Income / Shareholders' Equity
          

If a company has a net income of ₹20 Crores and shareholders' equity of ₹100 Crores, its ROE is 20%. This means the firm generated ₹0.20 of profit for every ₹1 of shareholder book value.

Why ROE is important for beginners

ROE tells you if management is run by skilled capital allocators or if they are wasting investor funds. Consistently growing ROE (>15-20%) shows a highly profitable franchise that has competitive advantages (often called a 'moat').