Return on equitymeasures a year's worth of earnings against shareholders' equity (the difference between a group's assets and its liabilities). If a firm makes £1m over 12 months and has a shareholders' equity of £10m, then the return on equity (ROE) is 10%.
ROE can be used to find firms generating large profits from little equity. Such firms are often well regarded as they create shareholder value by creating substantial assets for each pound invested.
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