Return on equity, or ROE, measures how much profit a company generates for every rupee of shareholders' equity. In effect it asks: how hard is the company working with the owners' money?
ROE = (Net profit ÷ Shareholders' equity) × 100
Example: Nova Industries earns a net profit of ₹120 crore on shareholders' equity of ₹800 crore. ROE = (120 ÷ 800) × 100 = 15%. For every ₹100 of owners' money, the company earned ₹15 of profit that year.
Notice this is a rate, not an amount. That lets you compare companies of very different sizes on the same basis.
- 1Find net profitThe bottom line after costs, interest and tax.
- 2Find shareholders' equityTotal assets minus total liabilities, from the balance sheet.
- 3Divide and convert to a percentage(Net profit ÷ Equity) × 100.
Return on Equity (ROE)
How much profit the company generates for every ₹100 of shareholders' money.
ROE = Net Profit ÷ Shareholders' Equity × 100
Return on Equity
15%
A high ROE is encouraging, but it should never be read in isolation. Debt can inflate ROE (less equity funds the same profit), and a shrinking equity base can do the same. Check how the ROE is being generated before drawing conclusions.
ROE links the income statement (profit) with the balance sheet (equity). That is why it is often described as a measure of how well management uses capital.
A rising ROE is not automatically good. It can rise because profit grew — or because equity shrank. The next lesson shows why that distinction matters.