What is Return on Equity (ROE)?

Return on Equity (ROE) measures the profit generated by a company relative to shareholders’ equity. It indicates how much profit the company generates for each rupee of equity capital. Generally, ROE is calculated using the following formula:

• ROE = Profit After TaxAverage Shareholder’s Equity x 100

For example, suppose a company earns ₹100 crore in profit and has an average shareholders’ equity of ₹500 crore. Now, the ROE would be 20% (₹100 crore₹500 crore x 100), which shows that the company generated ₹20 of profit for every ₹100 of average shareholders’ equity during the period.

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