ROE (return on equity)

ROE stands for return on equity, and it is a measure of the return a business generates relative to the equity invested by its shareholders. ROE is an important measure for assessing a business's profitability and efficiency in relation to its equity.

How it is calculated

ROE is calculated by dividing the net result (after tax) by the average equity, and then multiplying by 100 to give a percentage. The formula is as follows:

ROE as a percentage = (Net result / Average equity) × 100

Average equity is calculated by taking the sum of equity at the beginning and at the end of the period and dividing it by 2.

What is it used for?

ROE can be used to:

1. Assess the business's profitability. ROE gives an indication of how efficiently the business generates a return on its equity.
2. Compare with industry benchmarks. ROE can be used to compare the business's profitability with other businesses in the same industry and to identify strengths and weaknesses.
3. Evaluate management's performance. ROE is a measure of management's ability to use the equity efficiently and create a return for the shareholders.

Tips for improving ROE

1. Improve the profit margin. Identify and implement measures to increase the business's profit margin, for example cost control, price optimisation or productivity improvements.
2. Efficient use of equity. Use the equity to invest in projects or activities with a high return, and avoid unnecessary or low-yielding investments.
3. Debt structure. Consider the balance between debt and equity. An appropriate debt-to-equity ratio can increase the return on equity, but it is important to avoid an excessive debt burden that can increase risk.
4. Operational efficiency. Improve the business's operating processes in order to increase profitability. Identify and reduce inefficient operating costs and improve the use of resources.
5. Innovation and growth. Look for opportunities for product or market innovation in order to drive financial growth and increase the return on equity.
6. Continuous monitoring and adjustment. Follow ROE over time and adjust strategies and measures on the basis of results and changing market conditions.

Read more about how the Capassa Score gives you a combined picture of your business's profitability.