Glossary / Fundamentals
Return on equity (ROE)
Also called: ROE
Return on equity is net income divided by shareholders' equity, expressed as a rate. It describes how much accounting profit a company produced per unit of the equity capital its balance sheet reports.
How it is measured
How is return on equity measured?
Divide net income for a period by shareholders' equity, usually averaged across the start and end of that period. Every input comes from the filed financial statements, so the measurement is exactly as current as the last filing and does not move between reports.
Why it matters
Why does return on equity matter to a swing trader?
ROE is one of the standard summaries of capital efficiency: two companies earning the same profit on very different equity bases are doing genuinely different things. Two mechanical cautions matter more than most. Leverage raises ROE without any improvement in the underlying business, because debt-funded assets produce income while shrinking the equity denominator. And large buybacks or accumulated losses can drive equity toward zero or below, at which point the ratio becomes erratic or meaningless.
In Tapeline
Does Tapeline use return on equity?
Tapeline's company-finances check looks at company numbers like this one.
Related
See this in the product
Related terms
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General information about market vocabulary, written to be descriptive rather than prescriptive. Not investment advice — see the risk disclosure.