What is the Return On Equity Ratio?

The Return on equity or ROE is a financial ratio that measures the return based of the equity of the stock. This is considered to be one of the best fundamental indicators.

The Formula is

ROE= Net Income / Total average equity

Generally you want to see a stock with a high Return on equity. This is not always the case however. Some industries will have a higher ratio while others will naturally come out with a lower ratio.

This number should not be calculated annually if the company is a seasonal business. This means if the company only makes sales during spring and summer it should be calculated with those quarters. If it does make sales all year it should be calculated annually.

This ratio assumes that a company with a high ROE will grow faster when they reinvest their profits then one with a lower ROE (The less money you need to grow the faster you can grow). Needless to say if a company does not reinvest its profits this ratio becomes less important.