return on equity

Definitions #

A financial ratio that measures how efficiently a company generates profit from the money shareholders have invested.

Technical Calculated as net income divided by average shareholders' equity, indicating the return rate per dollar of equity capital.

Etymology #

Derived from return (to yield) and equity (from Old French equité, fairness). The financial term gained usage in early 20th-century corporate analysis.

Collocations #

return on equity ratio 权益回报率，净资产收益率
high return on equity 高净资产收益率，表明资本使用效率高

Real Business Examples #

The management team improved return on equity from 12% to 18% over two fiscal years by restructuring debt and optimizing asset utilization.
Analysts use return on equity to compare the financial performance of firms within the same industry.

Register & Variants #

Register: formal
BrE/AmE: Common in both variants; used in financial reports and investment analysis.

Synonyms & Antonyms #

Synonyms: ROE, net worth return
Antonyms: return on assets (ROA) — a different measure

Common Errors #

Using net income after preferred dividends instead of net income available to common shareholders. Calculate ROE with income attributable to common shareholders (net income minus preferred dividends).
Not averaging equity over the period; using year-end equity can distort the ratio due to capital fluctuations. Use average shareholders' equity (beginning plus ending divided by two) for accuracy.

Confusable Terms #

return on assets vs return on equity: ROA measures profitability against total assets, while ROE measures against equity only.
return on invested capital vs return on equity: ROIC includes debt financing in its capital base, showing performance against all invested capital.

Frequently Asked Questions

What is a good return on equity??

It varies by industry, but generally above 15% is considered strong in many sectors. For bank comparisons, check sector benchmarks.

Can return on equity be negative??

Yes, if net income is negative, ROE will be negative, indicating that the company is losing money relative to shareholder equity.

Published: 2026-10-04 Category: