Return on equity

Net profit divided by shareholders' equity - what the owners earned on the capital recorded as theirs.

Example

Northgate's 345,000 over equity of 2,005,000 is 17.2%.

Important

Only as meaningful as the equity figure underneath it, which is a historical accounting residue. A high return on a small book value can signal an asset-light business or a history of losses, and those are opposite situations.

Related terms

• Shareholders' equity — What is left for the owners once every liability is subtracted from every asset. Usually made up of the capital owners put in plus the profits the business has kept.
• Book value — The value of a business, or of an individual asset, as carried on the balance sheet - historical cost less accumulated depreciation, rather than any market estimate.
• Net profit — What remains after every cost, including interest and tax, has been subtracted from revenue. The bottom line of the income statement.

Lessons that explain it

• Appraising one company: the figures, and the growth already in the price — A practical pass over one listed business - what it earns, what it owes, what cash it keeps, and what the current price is already assuming. (14 min)
• What the three say together — Each statement answers a question the others cannot, and the interesting information is almost always in the disagreements between them rather than in any single figure. (14 min)

All 578 terms in the Investing glossary