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Return on Equity

This ratio indicates the percentage of net profit to equity shareholders' capital. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. Return on Equity shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable. It is calculated as follows:

return on equity

For example if net profit after tax, interest is Rs.4,20,000 and preference dividend is Rs.20,000 and equity capital is Rs.20,00,000, the net profit ratio will be calculated as follow:

net profit ratio

Return on Equity ratio is more helpful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them.


NEXT - Profitability Indicator Ratios: Return on Assets

Table of Contents
1) Profitability Indicator Ratios: Introduction
2) Profitability Indicator Ratios: Gross Profit Ratio
3) Profitability Indicator Ratios: Operating Profit Ratio
4) Profitability Indicator Ratios: Net Profit Ratio
5) Profitability Indicator Ratios: Return on Capital Employed
6) Profitability Indicator Ratios: Return on Equity
7) Profitability Indicator Ratios: Return on Assets

 

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