What is Return on Equity?

Return on Equity refers to the return on shareholder’s equity, which is like looking at the compounding effects of profits.

Shareholder’s equity, in the standard accounting equation, is the amount of assets and retained earnings in a company over and above the company’s liabilities. Return on Equity is a ratio which divides the net income of a company by the total shareholder’s equity in a company, which is effectively looking at the profitability of the profits of a company.

It is sometimes called “Return on Net Worth.” This ratio and similar ratios help analysts and investors compare companies to their peers in their respective industries and to find those who seem to be able to sustain and increase their business’s profit margin year after year.

This style of analyzing a company and it’s stock, where the company’s book values are combed through and the market position of the company is taken into consideration, is known as fundamental analysis.