Return on Equity
An evaluation of
profit earned in relation to
equity resources
invested. It is calculated by dividing
net profit before abnormals by
shareholders' equity.
By comparing
return on capital to
return on
equity,
investors can determine whether a
company's
financial leverage has benefited
shareholders. If return on equity is higher than return on capital, it indicates the company's
debt has provided a
positive return to shareholders. If the opposite is true, it indicates the company's current
leverage is reducing
returns to shareholders.