Know your metric
Importance of
Return on Equity
Profitability Indicator
ROE is a significant measure of a company's profitability and efficiency in generating profits from shareholders' equity, providing insights into financial health and management effectiveness.
Investment Attractiveness
A high ROE is attractive to investors as it indicates the company is using its equity base effectively to generate returns, making it a potentially lucrative investment.
Comparative Metric
ROE allows for comparison between companies in the same industry, helping assess competitive standing and investment desirability.
Drawbacks of
Return on Equity
Debt Influence
High debt levels can artificially inflate ROE, as the ratio does not distinguish returns generated from equity versus borrowed funds.
Not Sector Agnostic
ROE can vary significantly across different industries, making it less effective for cross-sector comparison.
Short-Term Focused
Companies might focus on short-term gains to improve ROE, potentially sacrificing long-term sustainability and growth.
Related Blogs
Related Templates
Try it now