Return on equity

Return on Equity (ROE) refers to the return on average common equity. It is used to measure the rate of return on the equity of the share holder. It is considered as an important financial ratio. The efficiency of a firm to make profit can be measured with ROE.

It shows how investment is used by a company to generate profits. ROE is expressed as percentage. It equals a fiscal year's net income divided by total equity. But many people are under the impression that a high - ROE Company make good investments

Even industries that do not require assets may have high ROE. Some industries may require more assets and other infrastructures while others do not. So the investment should not be made on the basis of REO of a company. High - REO companies with small asset bases may have to face competition. They do not have much entry barriers which increases the competition.

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