return on equity (ROE)

A profitability measure calculated by dividing net income by average shareholder’s equity. Return on equity is the level of income attributed to shareholders against the investment that shareholders put into the firm. It takes into account the amount of debt, or financial leverage, a firm uses. Financial leverage magnifies the impact of earnings on ROE in both good and bad years. Generally, the higher the ROE the better, but beware of a company that generates a high ROE by using debt that is excluded from the denominator.