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Explain Return on Equity or ROE

Return on Equity (ROE): The amount of net income returned as a percentage of share-holders equity. The return on equity measures a corporation's profitability by revealing how greatly profit a company produces with the money share-holders encompass invested.

ROE is stated as a percentage and computed as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for full fiscal year (that is, before dividends paid to common stock holders however after dividends to favored stock.) Shareholder's equity does not comprise preferred shares.

Also termed as "return on net worth" (abbreviated as RONW).

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