Return on equity

The return on equity (in short: EKR, business profitability, English: return on equity, abbreviated ROE) is a business management code and control size. It documents how high the capital invested by the investor has an interest rate within an accounting period. In contrast to the return on sales, return on equity can be a double-digit or even three digits.

Calculation

To calculate the return on equity is given to the net income (after taxes ) of a company in relation to the available equity at beginning of period:

Since only the durable and recoverable operating profit, adjusted for special factors as well as interest and tax payments, represents an authoritative for determining the profitability size, the return on equity can be determined by comparison with the EBIT:

A business owner or shareholders ( shareholder) on the basis of return on equity tell if his investment in the company is more or less profitable than an alternative investment.

Relationship between debt and equity

Is added to equity nor debt, thereby increasing the profit, so this increases the return on equity. This effect is called leverage or leverage effect.

Application in financial analysis

Potential investors may provide clues to the future development of the equity in conjunction with other indicators. An exceptionally low FCR often has overvalued assets back ( with the risk of future write-downs ) or unprofitable tied-up capital, for example in high inventories no longer required for operations or assets. An exceptionally high FCR, provided it is not based on an exceptional market position of the company, usually reflects a temporary emergency situation, for example by extraordinary income or a cyclical high point.

If corporate profits can be reinvested at a constant profitability, leaves the EKR - adjusted for extraordinary results and taking into account the dividend rate - conclusions on the future earnings growth.