What is Return on Equity (ROE)?
Nexa Consultancy | Startup & Finance Glossary
Return on Equity (ROE) is a financial performance metric that measures the profitability of a corporation in relation to the equity held by its shareholders. It indicates how effectively a company is using the money invested by its shareholders to generate profit.
For Startups: While ROE is a standard metric for mature, profitable companies, it can be less meaningful for early-stage, unprofitable startups, as they will have a negative ROE. However, as a startup approaches profitability, tracking ROE becomes more relevant.
For Investors: Investors use ROE to compare the profitability of different companies within the same industry. A consistently high ROE can be a sign of a strong competitive advantage or "moat".
Calculation: ROE = (Net Income / Average Shareholder's Equity) * 100
Example: A company with a net income of ₹20 Lakhs and average shareholder equity of ₹1 Crore has a Return on Equity of 20%.