The Return On Equity ratio measures, the rate of return that the owners of common stock of a company receive on their shareholdings. Return on equity or ROE signifies the how well a company is in the generation of returns on the investment it receives from its shareholders.
Importance of Return on Equity
Return on equity is the measure corporation's profitability, making it important. It reveals how much profit a company generates with the money shareholders have invested.
Return on Equity = Net Income after Tax / Shareholder's Equity
If your net income after tax is 1000 and the shareholder's equity is 2500. The return on equity is 100 * 1000 / 2500 = 40%