Return on Equity
Return on equity (ROE) is the best way to learn how much money a company is making for its investors. It is calculated by dividing the company's net profit by shareholder's equity. It is represented mathematically (in percentage terms) as follows:
ROE = Net Profit *100/Equity
ROE can reveal how much the company is making compared with how much it has invested to make that. Just to use a simple example, if you invest $100 in a rare baseball card and sell it for $120, your net profit will be $20 ($120 - $100 = $20), and your ROE would be $20/$100 or 20%. The $100 in the denominator is your equity in the card business.
The latest available ROE figures at the time of this writing for Microsoft Corporation, PepsiCo, and Motorola, were approximately 28.4%, 29.8%, and 5%.
When looking at a company, it is important to look at the trend in ROE to make sure that it is not steadily declining. Seasoned investors sometimes look at the ROE of other companies in the same industry to make sure that the ROE of the company they are looking at is in line with its competitors'.
Return on equity (ROE) is the best way to learn how much money a company is making for its investors. It is calculated by dividing the company's net profit by shareholder's equity. It is represented mathematically (in percentage terms) as follows:
ROE = Net Profit *100/Equity
ROE can reveal how much the company is making compared with how much it has invested to make that. Just to use a simple example, if you invest $100 in a rare baseball card and sell it for $120, your net profit will be $20 ($120 - $100 = $20), and your ROE would be $20/$100 or 20%. The $100 in the denominator is your equity in the card business.
The latest available ROE figures at the time of this writing for Microsoft Corporation, PepsiCo, and Motorola, were approximately 28.4%, 29.8%, and 5%.
When looking at a company, it is important to look at the trend in ROE to make sure that it is not steadily declining. Seasoned investors sometimes look at the ROE of other companies in the same industry to make sure that the ROE of the company they are looking at is in line with its competitors'.
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