Return on equity (ROE) is a return on investment metric used to assess a company's ability to use equity financing to earn profits and grow the business. It can also be interpreted as the profits earned by the company per each dollar of investment from the shareholders.

The formula for calculating the ROE is as follows:

ROE = Net Income / Shareholders' Equity

Alternatively, ROE can be derived by dividing the dividend growth rate by the earnings retention rate:

ROE = Dividend Growth Rate / (1 - Dividend Payout Ratio)

A consistent and growing ROE indicates that the company is reinvesting its earnings wisely to generate value for the shareholders to increase productivity. On the other hand, a declining ROE could be a sign that the management is reinvesting capital in unproductive assets which reduces profitability.

Reviews Add a review
No reviews yet

More From Corporate Finance Institute®

Browse our top rated business templates. See All
REIT Financial Model Template
This REIT financial model template acts as a guideline for modeling a real estate investment trust (REIT). This model will…
Energy Industry Comps Template Energy Industry Comps Template
This energy industry comps template provides a guideline and example of what a comparables universe would look like for a…
Financial Institution Dividend Discount Model
The financial institution dividend discount model uses future dividends to find the implied share price. This model is based on…
Loan Payment Calculator
The loan payment calculator allows users to determine the principal and interest payment each month until the full balance of…
DDM - Excel Dividend Discount Model Template
The dividend discount model template allows investors to value a company base on future dividend payments. This is based on…
Non-directional trading strategy template Non-directional Trading Strategies Template
The non-directional trading strategies template allow users to determine the profit when buying options. This template focuses on non-directional strategies…
See All