ROE (Return on equity)

ROE or Return on equity indicates the average profits a particular company is generating upon the invested amount. Thus the formula to determine the ROE of a company would be:

Thus, if a company has:
Total Profit of: 1,00,000/-
Stockholders equity at beginning: 5,00,000/-
Stockholders equity at end: 1,00,000/-

Thus, in this case the rate of earnings or earnings generated by the company in the last annual year would be 33.33%, which could be counted as a good ROE, but an overburdened debt upon a company could also overinflate the ROE of a company.

For instance: (example of an Over Inflated ROE)

TOTAL Profit: 1,00,000/-
Stockholders equity at beginning: 5,00,000/-
Stockholders equity at end: 1,00,000/-
Total Debts: 2,00,000/-

Thus, in this case the ROE of the company would be:

In such cases the company would show a high ROE or an inflated ROE (ex- 100%) as it is bearing a huge debt upon it. Thus, the most accurate way to go through a stock's ROE would be by choosing a company which has a good ROE (say more than 12%) along with low debts / dues upon it.