Return on Equity Metric
Measure profitability by examining your ability to generate revenue for each unit of shareholder equity.
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Overview
The Return on Equity KPI measures your organization’s ability to generate revenue for each unit of shareholder equity.
The return on equity ratio not only provides a measure of your organization’s profitability, but also your efficiency. A high or improving ROE demonstrates to your shareholder’s that you’re using their investments to grow your business.
Formula
Debt to Equity (D/E) = (Total Liabilities) / (Shareholders Equity)
Note: Total Liabilities and Shareholder Equity can be found on the balance sheet.
Key terms
- Shareholder’s equity: Financing acquired through selling common and preferred shares to investors.
- Net income: Also called net profit, this is the amount of earnings after you subtract cost of goods sold, taxes, and other expenses.
Success indicators
- A return on equity rate between 15% and 25% is generally considered good.
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