What Is Return on Equity?

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of a corporation's profitability in relation to stockholders’ equity.

Return on equity gives investors a sense of how good a company is at making money. This metric is especially useful when comparing two stocks in the same industry.

*Return on equity (ROE) measures a corporation's profitability in relation to stockholders’ equity.

*Whether an ROE is considered satisfactory will depend on what is normal for the industry or company peers.

*As a shortcut, investors can consider an ROE near the long-term average of the S&P 500 (14%) as an acceptable ratio and anything less than 10% as poor.