Return on Equity

Measure profitability by examining your ability to generate revenue for each unit of shareholder equity.

Financial KPI Examples | Return on Equity

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.

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