It will be worth a read, as it explains how ROE can be used to interpret the growth potential of a company. If one wants to remember just one number for the ROE, then here are the statistics. I’ve analyzed the 5-Year Return on Equity of the top 500 companies listed on the BSE. Here are numbers from three real-life companies and ROE calculations for each of them. Some analysts will actually “annualize” the recent quarter by taking the current income and multiplying it by four.
- No matter what the case is, though, a negative or very high level of ROE is something to consider, and its causes should be investigated.
- But it is also important to compare ROE between comparable companies only.
- Net income can be found on the company’s income statement, but shareholders’ equity is listed on the balance sheet.
- If you’re ready to invest in stocks on your own, consider an online brokerage or robo-advisor.
- A DuPont analysis is a way to evaluate various parts of a company’s return on equity to better understand what kinds of business activities lead to a higher return on equity.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors. A 2019 analysis of more than 6,000 firms across more than 100 industries found ROE averaged about 15.6%. The highest ROE in this study belonged to building supply retailers, which boasted an average ROE of nearly 96%. Other high ROEs were seen in broadcasting companies (82%) and railroad transportation companies (52%). Low ROEs in this study belonged to consumer and office electronics firms, which showed a -33% ROE. Precious metals and tobacco were also low, with both ROEs close to -3%.
Finally, the ratio includes some variations on its composition, and there may be some disagreements between analysts. The amount of equity a company has left after paying its investors dividends is known as retained earnings. Though ROE is a strong tool for assessing a firm’s https://online-accounting.net/ financial efficiency, it does have its share of limitations. A subjective ROE reading can help uncover structural underlying issues with regards to the firm’s operations. For instance, excessive debt levels and inconsistent profits might be identified, amongst others.