Explain ROE

ROE stands for Return on Equity, which is a financial ratio that measures the profitability of a company by dividing its net income by its shareholders' equity. It is a measure of how well a company is using its shareholders' investment to generate profits.

A very good example of ROE would be a company that has a net income of $100,000 and shareholders' equity of $500,000. In this case, the company's ROE would be calculated as:

ROE = Net Income / Shareholders' Equity

= $100,000 / $500,000

= 20%

This means that for every $1 invested by shareholders in the company, the company generates a profit of $0.20. This is a good ROE, as it indicates that the company is able to effectively use its shareholders' investment to generate profits.

Alternatively, if a company has a low ROE, it may indicate that it is not using its shareholders' investment efficiently and may need to improve its operations or find new ways to generate profits.