Return on Equity

measures the return that the owner realized on his investment in the business. Return on Equity measures the net profit (after tax) generated by the business to the net worth of the business (that is, owner’s equity). The number produced lets the owner evaluate the return being realized on his investment in the business. The formula for Return on Equity (ROE) is as follows:

Return on Equity = Net Profit (after Tax) ÷ Net Worth