ROE (return on equity) is one of the key formulas that most MBAs (yes, including Marketers) remember learning on their path to financial literacy. It is often the best FIRST place to start for financial statement analysis. In simplest terms, it tells investors what kind of % return they are getting on their invested money. Higher the better.
If you only learn a few financial metrics, this is one of them. The formula is simple and worth your memory and understanding: ROE = Net income / Shareholder Equity
- Net income = bottom line on the income statement (revenue-expenses)
- Shareholder equity = Assets – liabilities
ROE is beautifully simple and worth knowing. For many reasons:
- It factors elements from both the income statement and balance sheet
- It applies to all companies and industries (caveat on this point later)
- It can easily be broken into component parts for further analysis
I prefer the DuPont formula.
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