Hello again friends I am back again with new term it Return of Equity(ROE) and don't confuse it with ROCE(Return on Capital Employed) they both are different terms.
Return on Equity is the amount of money earned by business on its shareholders fund including reserves and surplus. In simple terms how much a business earns on the initial capital invested by business is known as return on equity.
Calculation:
Net income earned divided by shareholders funds multiplied by 100
Eg. If net income is Rs. 33 and share holders fund are Rs. 133 then
ROE is(33/133) x 100= 24.81%
You can find the data of net income in P & L account and shareholders fund in Balance sheet.(PAT is also called net income)
Use:
1) You can understand and compare similar business and make an investing decision.
2) Can be used in comparison with dividend payout ratio. If company has ROE less than 10 and has a dividend payout ratio of more than 90 it is good.
3) See average of 5 years of ROE because it helps in better evaluation.
Thank you for reading if you got any question feel free to comment and give a like so I can feel motivated to write more.
Merci.
