Important for equity investors: Return on Equity (RoE)The investors who invest in direct equities, select stock(s) on the basis of certain ratios. One of such ratios in Return on Equity (RoE). It is important to know about this ratio, because proper understanding of the concept of RoE would help us to selct stock in future.
RoE of a company is a profitability measure which calculates how much profit a company has made on the money that the share-holders have invested in that particular company. RoE is expressed in percentage terms and is derived by dividing Profit After Tax (PAT) by shareholders' equity. RoE also measures the efficiency of a particular company indicating how well the company's management is deploying the shareholders' capital. A rising RoE suggests that a company is increasing its ability to generate profit without needing additional capital. Generally an increasing RoE is good for the shareholders. However, it should be remembered by the investors that write-downs, buy-backs and high level of debt reduce the value of the shareholders' equity which consequently leads to an artificial increase in RoE.