Return on equity (ROE) is the amount of net income returned as a percentage of shareholders’ equity. Return on equity, (also known as “return on net worth” or RONW) measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.
The calculation for Return on Equity is relatively simple,
ROE = Net Income/Shareholders’ Equity.
ROE is typically expressed as a percentage.
ROE is typically measures an entire fiscal year and is calculated before dividends are paid to common stockholders but after dividends to preferred stock holders.
Shareholders’ equity may not include preferred shares, and is sometimes called return on common equity (ROCE) = net income – preferred dividends / common equity.
