Return on equity (ROE)
Return on equity compares profit attributable to ordinary shareholders with equity, usually expressed as a percentage. This ratio asks how much profit is generated for the ordinary shareholders relative to their equity. Average equity can better reflect a substantial mid-year issue or distribution, but use the denominator specified. A high ratio may also reflect a small equity base and substantial debt.
Worked example
Attributable profit 40 divided by average ordinary equity 400 gives 10%.
Common mistake
Specify profit and equity measures, including preference dividends and average versus closing balances. This is supporting analysis beyond FA's named basic ratios.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FA | Supporting | September 2026–June 2027 |
| ACCA | K1 | Supporting | July 2027–August 2028 |
| CIMA | BA3 | Direct | Official assessment-window verification pending |
| FIA | FFA | Supporting | September 2026–June 2027 |
Related terms
Also called: ROE