Return on equity (ROE) is a percentage-based performance metric designed to determine how well a company is putting the equity investments it has gained to work in order to increase company value. In other words, it reveals if management is providing a good return on equity. It is measured by dividing net income by total company equity, and is best used when compared to the ROE of other firms within the same industry.
ROE is calculated by dividing annual net income by shareholder equity:
ROE = (annual) Net Income / Shareholder’s Equity
Net income is found on the income statement, while equity is found on the balance sheet. Since equity is assets minus debt, ROE shows how well a company is able to turn assets into profits. Another way to look at ROE is how many dollars of profit are you getting back for each dollar of equity put into the company.