RETURN ON EQUITY (ROE)
This ratio is arguably the most important in business finance. It measures the absolute return delivered to the shareholders. A good figure brings success to the business – it results in a high share price and makes it easy to attract new funds. These will enable the company to grow, given suitable market conditions, and this in turn leads to greater profits and so on. All this leads to high value and continued growth in the wealth of its owners.
ROE = PAT x 100
Owner’s funds
At the level of individual business, a good return on equity will keep in lace the financial framework for a thriving, growing enterprise. At the level of the total economy, return on equity drives industrial investment, growth in gross national product, employment, government tax receipts and so on.
It is, therefore, a critical feature of the overall modern market economy as well as of individual companies.
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