Explain the concept of ROE (Return on Equity). - Vidyadip

Question

Explain the concept of ROE (Return on Equity).

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Answer

Meaning: It is the ratio of net profit after interest and tax and owner's investment. Significance: The significance of computing this ratio is to find out how efficiently the owners funds supplied by the shareholders/ owners are being used. Example, if Sushmita the owner of a grocery shop has an equity stake of 70,000 in the business, she has borrowed ₹ 30,000 (rate of interest is 10%). This will attract an interest of 3,000 @ 10% per annum. If the Net Profit is 14,000 then:$\text{ROE}\frac{₹ 14,000}{₹ 70,000}\times 100 = 20\%$

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