Return on equity (ROE) in the stock market is the percentage obtained when a company's net profit after tax is divided by its shareholders' net worth and multiplied by 100. Net worth is the equity share capital of the company plus its reserves and surplus.
For people wondering what ROE means in the stock market, the ratio indicates the profit a company has earned for every Rs 100 of money that belongs to its shareholders.
A higher percentage shows that the firm has earned more profit using the same amount of shareholders' money and the stock screeners display this figure as a single number for each listed company.
Net worth, RoNW and the Rs 20 example
Indian company documents often use the term "Return on Net Worth" (RoNW), while global usage says return on shareholders' equity. In standard Indian equity analysis, both names are treated as the same ratio.
A hypothetical company has earned a net profit after tax of Rs 50 crore on a net worth of Rs 250 crore. Dividing 50 by 250 and multiplying the result by 100 gives an ROE of 20%.
The profit used is generally for the trailing 12 months. Some analysts use the average net worth of the period, while others use the closing net worth, so same company can show slightly different figures from different sources.
Why investors check it
NSE Indices uses ROE, along with Debt/Equity and earnings per share (EPS) growth variability, in the quality score of its Nifty500 Quality 50 index, and all three are studied over the previous 5 years.
Stock screeners often show ROE beside the debt to equity ratio, as a high ROE can come from heavy borrowing as well as from strong profits. Current ROE figures differ by source and method.
ROE counts only shareholders' money, while return on capital employed (ROCE) counts borrowed money too, so a company with heavy debt can show a high ROE and a modest ROCE.