Glossary · UK
What is Return on Equity (ROE)?
A profitability ratio showing how much profit a company generates for every pound of shareholder equity.
Full Definition
Return on Equity (ROE) measures how efficiently a company turns shareholders' money into profit, expressed as net income divided by shareholder equity. A higher ROE generally suggests management is generating more profit per pound invested by owners, which is why it is widely used to compare companies within the same sector -- comparing ROE across very different industries is less meaningful because capital intensity varies enormously. ROE can be inflated by high borrowing (leverage): a heavily indebted company can show a strong ROE even with mediocre operating performance, because debt shrinks the equity base rather than because the business is genuinely more profitable, so it is usually read alongside gearing and profit margin figures rather than in isolation. For UK small business owners and investors, ROE is a useful cross-check when valuing a limited company or comparing it against sector benchmarks before a sale, refinancing, or investment decision.
How Return on Equity (ROE) is calculated
ROE = (Net income / Shareholder equity) x 100- Net income
- Profit after tax for the period.
- Shareholder equity
- Share capital plus retained earnings and reserves (net assets).
Worked example: A company with GBP 50,000 net income and GBP 250,000 shareholder equity has an ROE of 50,000 / 250,000 x 100 = 20%.