ROE

 Understanding Return on Equity (ROE)

Return on Equity (ROE) is like a magical way to see how good a company is at making money using the money that belongs to its owners. Imagine you have a lemonade stand, and you want to know how good you are at making money with the money you have saved. ROE helps investors understand this for companies.

 What is Return on Equity (ROE)?

Let’s break it down:

• Return: This is the profit or money the company makes.
• Equity: This is the money that belongs to the company's owners or shareholders, just like your savings in your piggy bank.

ROE tells us how much money the company makes for every rupee of equity. It’s like seeing how much lemonade you can sell for every rupee you spent on lemons and sugar.

How to Calculate ROE

To find ROE, you divide the company’s profit by its equity. It’s like dividing the money you made from selling lemonade by the money you spent on ingredients.

The Layman Example

Imagine you have ₹100 saved up in your piggy bank. You use this ₹100 to buy lemons, sugar, and cups to set up your lemonade stand. After selling lemonade for a week, you make a profit of ₹20.

Here’s how you would figure out your ROE:

• Net Profit: ₹20 (the money you made from selling lemonade)
• Shareholders' Equity: ₹100 (the money you had in your piggy bank)

This means you made ₹0.20 for every rupee you invested in your lemonade stand, or a 20% return on your equity.

 Applying This to Companies

Now, let’s apply this idea to a company using ROE. It helps investors see how well a company uses its owners' money to make more money.

Let's look at Infosys, a big technology company in India.

•  Suppose Infosys has a net profit of ₹18,000 crore.
• And suppose Infosys has ₹90,000 crore in shareholders' equity.

The ROE would be:

This means Infosys makes ₹0.20 for every rupee of equity, or a 20% return on equity.

Relation with Return on Investment (ROI)

ROE is closely related to Return on Investment (ROI), but they measure slightly different things:

• Return on Investment (ROI): This measures how much profit you make on your overall investment, including borrowed money (debt) and your own money (equity). It’s like seeing how much profit you made from your lemonade stand compared to all the money you put in, even if some of it was borrowed from your parents.
• Return on Equity (ROE): This measures how much profit you make using just your own money (equity). It’s like seeing how much profit you made from your lemonade stand compared to the money you saved in your piggy bank.

Let’s go back to your lemonade stand example to understand those term better:

• Total Investment: ₹150 (₹100 from your piggy bank and ₹50 borrowed from your parents)
• Net Profit: ₹30

 ROI Calculation

This means you made 20% profit on your total investment.

ROE Calculation

This means you made 30% profit using just your own saved money.

 Why is ROE Important?

ROE helps investors decide if a company is a good investment. Just like you want to know if you’re good at running your lemonade stand, investors want to know if a company is good at making money with its equity.

Conclusion

Return on Equity (ROE) is a simple way to see how well a company uses its owners' money to make more money. By understanding this and its relation to ROI, you can make better choices when investing in the stock market.

You can find more information about stocks and ROE on websites like NSE India and Moneycontrol.

Happy investing!