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Return on equity (ROE)

Method of calculation

Formula for return on equity (ROE): net profit / equity * 100%

Ratio's description

This ratio allows to assess the effectiveness of equity use, thus it is particularly important for the company's owners, since they are interested in the amount of net profit that can be generated from the equity. The value of the ratio can be compared with the return rate from the investments on the financial market, e.g. the interest rate of treasury bills/bonds, return rate on stock indices, interest rates of bank deposits.

Ratio's interpretation

  • High ratio's values and their increase over time are assessed positively (it indicates high or increasing profitability of equity).
  • Low ratio's values and their decrease over time are assessed negatively (it indicates low or decreasing profitability of equity).

WARNING! The above interpretation is valid only if ROE, ROA and ROS are simultaneously greater than 0.

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