Return on Equity (ROE)

Definition

Net profit after preferred dividends / Average total equity for the last 2 years (in %)

Average Invested capital = Return On Equity is one of the most widely used measures of how well a company is performing for its shareholders, as it indicates how much was earned for each unit invested by the owners. It's a relatively straightforward benchmark for investors to compare the company's use of its equity against other investments.

The difference between ROE and ROA lies in the company's use of leverage, or debt financing. If a company earns more (less) with its debt-financed assets than the cost of that debt, then the difference is available to increase (decrease) the return on equity. A company deep in debt would get a high Return On Equity due to leverage and the Return On Assets would be relatively low.