Fundamental analysis
Return on equity (ROE)
Definition
Net income ÷ shareholders’ equity, usually shown as a percentage: profit relative to the book value of the owners’ stake.
Example
Say company XYZ earns $90 million on $600 million of shareholders’ equity: an ROE of 15%. If it borrows $300 million to buy back shares, equity falls to $300 million, and even if the extra interest trims net income to $81 million, ROE jumps to 27%, though the business itself has not improved.
Hypothetical numbers, for illustration only.
Also defined in
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