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Understanding Return on Equity

Understanding Return on Equity

Submitted by • August 26, 2020 blog.finology.in

In the previous blogs, we understood the meaning and application of the accounting ratios of Return on Investments (ROI) and Return on Assets (RoA). While ROI gives an insight into overall profitability, ROA focuses on the returns generated through the efficient use of the assets a company possesses.

In this blog, we will take a look at the one of most crucial aspects of returns that directly impacts the shareholders.

Equity signifies the amount of ownership an investor has in a company. It is the share of the money that an investor has invested in a company. Hence, the ratio of return on Equity suggests a company's ability to return profits to its shareholders. It is a ratio that holds the highest importance for any shareholder. RoE is an indication of how well a company uses its shareholder's funds.

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