Legendary investor Warren Buffet is often quoted as advising investors to analyze purchasing a company’s shares as if you were buying the whole company.
One of the items you’d probably evaluate if you were actually buying a company is your return on investment.
return on investment = annual profits/total investment
For instance, your return on investment is 10 percent if you bought a company with a $100,000 cash investment and you made $10,000 in profits annually (10,000/100,000).
ROE measures a company’s returns on its shareholders’ investments in the same manner. ROE is a company’s annual net income divided by its shareholders equity.
ROE = net income/shareholder’s equity
ROE is widely reported, and ...