Finance Formulas / July 17, 2018 / Alyvia French
Return on equity (ROE) measures the rate of return on the ownership interest or shareholders’ equity of the common stock owners. It is a measure of a company’s efficiency at generating profits using the shareholders’ stake of equity in the business. In other words, return on equity is an indication of how well a company uses investment funds to generate earnings growth. It is also commonly used as a target for executive compensation, since ratios such as ROE tend to give management an incentive to perform better. Returns on equity between 15% and 20% are generally considered to be acceptable.
The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity, or said differently, all uses of capital (assets) are equal to all sources capital (debt: liabilities and equity: shareholders' equity).
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