What is roe?

Key Points

• ROE, also known as stockholders' equity return on investment / earnings per share, is an important financial performance indicator used to measure an enterprise's profitability.

• ROE refers to the ratio of net profit to the average net assets of an enterprise, and is calculated as follows: return on assets = net income/average net assets × 100%.

• ROE is mainly used for comparison between companies in the same industry.

Concept Explanation

ROE, also known as stockholders' equity return on investment / earnings per share, is an indicator used to measure how much net profit is generated for each unit of net assets created during a certain period (usually one year), i.e., the ratio of net profit to the average net assets of an enterprise during that period.

The calculation formula of ROE is:

ROE = net income / average net assets × 100%.

(where average net assets = (initial net assets + ending net assets) / 2).

ROE reflects the return on investment compared to shareholder equity, and reflects the company's ability to generate profits using net asset value. It is an important indicator used to measure a company's profitability. Generally speaking, the higher the ROE, the higher the return on investment. This indicator reflects the ability to obtain net profit from own capital.

ROE is mainly used for comparison between companies in the same industry. Companies in different industries may have significant differences in asset-liability levels due to different business models, which may affect comparability. In addition, negative ROE due to companies still being in a net loss position or having negative net assets cannot be used to analyze the company, nor can it be compared with companies with positive ROE.

An example of ROE:

The following is the balance sheet from Apple Inc.'s 2021 annual report as of September 25, 2021:

The annual report shows:

At the end of fiscal year 2020, Apple's net assets were $65.339 billion.

At the end of fiscal year 2021, Apple's net assets were $63.09 billion.

therefore,

Apple's average net assets in fiscal year 2021 = (65.339 + 63.09) / 2 = $64.2145 billion;

The following is the income statement from Apple's 2021 annual report:

Apple's net income for fiscal year 2021 was $94.68 billion;

thus,

Apple's ROE in fiscal year 2021 = $94.68 billion / $64.2145 billion × 100% = 147.44%.