Return on equity (ROE) simply means how much return you are generating over the shareholders’ funds.
Shareholders’ funds are called equity.
What is Equity?
The money a company receives after selling its ownership is called equity or shareholders’ funds.
Suppose you open a samosa shop in your local area. You raise ₹5 lakh after selling 25% ownership of your shop. At the end of the year, you generate ₹1 lakh in profit.
To calculate the return on equity (ROE), you divide the profit by the total shareholders’ funds, which is ₹5 lakh in this case. So, your ROE will be:
ROE = (Profit / Shareholders’ Funds) × 100
ROE = (1,00,000 / 5,00,000) × 100 = 20%
This means that for every ₹100 invested by the shareholders, your samosa shop is generating ₹20 in return. In simple words, ROE shows how well you’re using the money invested by the shareholders to generate profits.
With over 3 years of experience in financial markets, we focus on simplifying global and Indian markets through clear, practical insights. Our expertise also extends to the evolving landscape of digital finance, including blockchain, stablecoins, and decentralized finance (DeFi).