What is a stock's return on equity (ROE), and how is it calculated?

A stock's Return on Equity (ROE) is a financial metric indicating the profitability of a company in relation to its shareholders' equity. It is calculated by dividing the net income by the average shareholders' equity. The formula for ROE is: \[ ROE = \frac{\text{Net Income}}{\text{Average Shareholders' Equity}} \] ROE provides insights into how efficiently a company utilizes equity capital to generate profits, and a higher ROE is generally considered favorable. read less