Definition

Return on equity (ROE) is a ratio that helps identify how well a company leverages its assets to generate income or profits.

Calculation

Return on Equity = Net Income / Average Shareholders' Equity

Why is this important?

When looking at the ROE of a company, investors should make sure to compare a stock to its peers in order to gauge an industry average. If a stock has an above average ROE to its peers it could be inferred that the company's leadership team is better than its peers at generating profits from a company's assets.