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# What Is Return On Equity Ratio (RoE)?

Return on Equity Ratio indicates the profitability of a company. It evaluates the profit-making scenario by using shareholders’ equity. ROE interprets how much profit a company generates by using each rupee from shareholders’ equity. Although the ratio doesn’t necessarily reveal the entire financial movements of a company, it certainly helps investors to evaluate a company’s value and growth to some extent.

ROE calculation consists of two main points: net income or profit of a company and shareholders’ equity. Here net income means the profit of a company for a fiscal year. In order to calculate ROE net income is to be divided by shareholders’ equity. The formula of the return on equity ratio is as follows:

Here net income indicates profit after tax for one fiscal year. Basically, the ratio shows how much profit a company can generate form each shareholders’ equity.

## Why Return on Equity Ratio Is Important?

In this context, one thing is quite important that the comparison of return on equity ratio should be done within the same industries.

## Return on Equity effects

### Positive ROE:

It interprets company is well organized at generating shareholders’ return. It indicates how wisely a company can invest the amount and increase productivity and profit. It shows the company can generate more assets to cover its liabilities. Therefore, undoubtedly it is a safe investment choice.

### Negative ROE:

In contrast, a decreasing ROE means the company is making a poor decision and their equity management efficiency is not good at all. So it is clear that a company with negative ROE has more debt and not a safe investment choice.

## Return on Equity Ratio Rates

As I mentioned lower ROE ratio is not good for investing, so investors generally prefer a company with a high ROE ratio. There is a certain scale by which one can measure the high and low ROE ratio. Generally, a minimum 15% ROE indicates better valuation and profitable stock and below 10% ROE considers as poor rates for a company.

This chart shows ROE rates of more than 15%. So, according to the chart 33.23 rates consider more profitable. One of the most important point regarding ROE ratio analysis is an average of 5 to 10 years ROE ratio give a better picture of the growth of a company.

However, relying solely on ROE for investment is not safe but this indicator is certainly an important tool in terms of investment.