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. Use the following formula when calculating return on equity:

Net income ÷ Shareholder’s 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.

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.

Related Metrics & KPIs

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Accounts Payable Turnover

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Return on Equity

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Current Accounts Receivable and Accounts Payable

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