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What is the Return on Equity Ratio and how is it used?

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Question: What is the Return on Equity Ratio and how is it used?
Answer:

The return on equity ratio, sometimes called return on net worth, is the most important of all the profitability ratio to investors in the company. It allows investors to see how effectively the money they invested in the firm is being used. It is essentially a measure of how investors have fared with regard to their investment in the firm. Return on equity is usually seen as the bottom line measure of firm performance.

Return on equity is measured:

Net Income/Total Shareholders Equity* = _____%

Total Shareholder's Equity includes the sum of Retained Earnings, Paid-in Capital, Common Stock, and Preferred Stock.

As an example, if the return on equity is 15%, that means, in an accounting sense, that the company generated 15 cents in profit for every dollar in equity.

The return on equity ratio can also be calculated using the DuPont Method.

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