How to interpret ROE

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How to interpret ROE

A higher ROE suggests that a company is able to effectively generate cash internally. This ratio is useful for comparing the profitability of a company to that of other firms in the same industry. The better way is to compare a company's ROE with its industry average.

 

	Company A		Company B
Net Income Rs 200 crore		Net Income Rs 300 crore
Equity Rs 400 crore		Equity Rs 1200 crore
RONW 50% (200/400)%		RONW 25% (300/1200)%

 

Company A generated 50 percent returns in the form of earnings for every rupee invested by shareholders. Company B generated lower returns for its shareholders compared to company A.

 

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