If there is one single ratio that every share investor should know about analysing the profitability of a business, it should be none other than return on equity (ROE). Return on equity is arguably the most important formula in business finance. Even the richest stock investor in the world, Warren Buffett, uses it to assess the quality of a company as well. So, what does ROE actually means? How can we make use of it to improve our portfolio performance? We will find it out in this article.

What actually Return on Equity (ROE) is?

Return on equity (ROE) is the amount of net income generated by a company as a percentage of its shareholder’s equity. It measures a profitability of a company by showing how much net profit a company can generate with the money invested from shareholders.  

“Return on Equity = Net Income/Shareholder’s Equity”

Return on equity ...