PART 9 : Ratio Analysis

Return on Equity (ROE) RATIO

What does it measure? It measures how much return the owners are getting on the money they invested in the business. This is the most important ratio for investors. Formula: (Net Profit ÷ Shareholders' Equity) × 100 - Example: - Net Profit = ₹50,000 - Owner's Money (Equity) = ₹200,000 - Calculation = (50,000 ÷ 2,00,000) × 100 = 25% Interpretation: This means the owner earned 25% return on his investment in one year. This is excellent because if the owner had put the money in a bank fixed deposit, he would get only 7-8%. A company with an ROE above 15% is considered good. Below 10% means the owner is better off investing elsewhere.