Every Investor is curious to know that the money invested in him is getting the right profitable path and how much return the investor getting from the company.
Return on Net Worth (RONW) or Return on Equity (ROE) is the calculation reveals how much Profit company generate to their shareholders from the Share Equity. Return on Equity is calculated:-
Return on Equity = Net Income/Share holder’s Equity
Importance of Return on Equity
The company with high Return on Equity is capable of generating good Profit. ROE is also used to compare company capacity to generate more profit in the same industry.
It also indicates the good decision of Management for deploying the share capital, For the clear picture, you must see the average of past 5 years.
In ROE if the value of Equity goes down the rate of ROE goes up.
The companies with high debt are treated as low equity, and it results in high Return on Net Worth.
Return on Net Worth is the back boon for the share fundamental analysis and will provide the performance of the company
The Low ROE doesn’t mean that the company is not performing good, because of the reinvestment by the company.
The Dupont Formula is also used to go deeper for Return on Equity.
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