Term · Profitability & Growth
Return on Equity (ROE)
In briefReturn on equity (ROE) relates net income to the equity employed. For small caps it shows how efficiently the capital provided by shareholders is remunerated, and it is important in peer comparison.
Definition
Net income relative to the equity employed.
How it is calculated
Formula. ROE = net income ÷ equity × 100.
Why it matters for small caps
Shows how efficiently a small cap remunerates the capital provided by shareholders — important in peer comparison (Step 5).
Common misreadings
- A high ROE is sweepingly judged as positive, but it can also result from a very thin equity ratio (high leverage).
In the process
Frequently asked
What is return on equity (ROE)?
It measures how much profit is earned on equity. It is expressed as a percentage.
How is ROE calculated?
You divide net income by equity and multiply by one hundred. This gives the return on equity.
Why is a high ROE not automatically good?
It can result from a very thin equity ratio and thus high leverage. High leverage boosts ROE but increases risk.
Related terms
Sources
Primary
IFRS Foundation – IFRS Accounting Standards Navigator
https://www.ifrs.org/issued-standards/list-of-standards/
https://www.ifrs.org/issued-standards/list-of-standards/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.