Return on equity reveals how much profit a company generated in comparison to the total amount of shareholder equity found on the balance sheet. It shows how well a company is using shareholder's funds to produce earnings. Typically, investors compare ROE of one company to that of other firms in the same industry to arrive at a meaningful investment decision. Companies having high return on equity are preferred.However, the metric may not be much useful in case of companies having high debt levels.
The formula is given by:
Return on Equity = Net Income/Shareholder's Equity