What is Return on Equity? Why it is important in fundamental analysis of a stock?

Generally when we are studying in 11th class or 12th class in commerce stream we comes to know terms like Return on Equity, Return on Capital Employed, Return on Assets etc. We learnt out formula and practice questions related to ROE, ROCE etc. and passing out both classes. But we are not getting deeply knowledge of ROE formula and how does it work?

But in this blog we deeply dive into Return on Equity term along with live examples where it is using and how it benefit in fundamental analysis of a stock. Let’s find out answer of question “What is Return on Equity”?

ROE tells us how a company using investment efficiently of a shareholder to convert into profit. Let suppose you are going to invest in any company then you must have to pay attention on ROE of that company. But before you have to understand what is ROE and how does it work in simplify language by your host Pankaj Kumar.

Breaking Down ROE Formula:

ROE=Net Income/Shareholders’ Equity

​As above formula suggest the meaning of ROE but we are further breaking down their meaning in simple language so that you can easily apply during assessment of stock.

Net Income

Net income as name suggest after paying all your expenses whatever left with you is net income. In a company case Net profit means Revenue of a company from which reduce Direct Expenses, Indirect Expenses, Depreciation, Interest and Taxes.

Shareholder’s Equity

Shareholder’s Equity means the owner of a company holding investments in that company. This is also known as “Owner’s Stake” as well.

Let’s Understand Components of ROE:

We are going to further divide it’s component to simply more to understand it:

Income

Income means anything which you received towards any services offered or sales of products. After deducting all expenses occurred towards providing services or goods offered shall be remaining portion called income.

Shareholder

Shareholder means who is the owner of the company. A company is running by directors, Executive directors, independent directors but the actual owners of the companies are shareholders. Who invested their hard earned money in the company for running and expansion. Please note that Shareholder also can be Executive director, MD of the company.

Equity

Every company to it’s shareholder issuing Equity. Equity suggest how much shareholding of anyone is in the company.

You can understand ROE of any company with the help of this article.

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