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The return on equity (ROE) is a measure of the profitability of a business in relation to its equity; [1] where: . ROE = Net Income / Average Shareholders' Equity [1] Thus, ROE is equal to a fiscal year's net income (after preferred stock dividends, before common stock dividends), divided by total equity (excluding preferred shares), expressed as a percentage.
ROCE is used to prove the value the business gains from its assets and liabilities. Companies create value whenever they are able to generate returns on capital above the weighted average cost of capital (WACC). [3] A business which owns much land will have a smaller ROCE compared to a business which owns little land but makes the same profit.
This procedure is done because, unlike market values which reflect future expectations in efficient markets, book values more closely reflect the amount of initial capital invested to generate a return. The denominator represents the average value of the invested capital rather than the value of the end of the year. This is because the NOPAT ...
ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company.
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investingRead More...
Today we'll look at Straumann Holding AG (VTX:STMN) and reflect on its potential as an investment. To be precise...
Cash return on capital invested [1] (CROCI) is an advanced measure of corporate profitability, originally developed by Deutsche Bank's equity research department in 1996 (it now sits within DWS Group).
Return on tangible equity (ROTE) (also return on average tangible common shareholders' equity (ROTCE)) measures the rate of return on the tangible common equity.. ROTE is computed by dividing net earnings (or annualized net earnings for annualized ROTE) applicable to common shareholders by average monthly tangible common shareholders' equity. [1]