ROE (RETURN ON EQUITY) OR RETURN ON EQUITY OF A NEW COMPANY

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ROE (Return on Equity) or Return on Equity (Equity) is a financial metric that indicates the return a company generates on the funds contributed by its shareholders. Sis calculated by dividing net profit by the company's net worth. It is a measure of how efficiently the company is using its shareholders' funds to generate profits. In the case of a new company, ROE can be an important metric for assessing the return on shareholders' investment and the efficiency of the use of available resources. It is important to bear in mind that ROE should not be the only indicator to assess the financial health of a company. It is necessary to analyse other metrics and factors, such as revenue growth, liquidity, solvency, among others.

ROE (Return on Equity) or return on equity of new companies

ROE (Return on Equity) is a financial metric that measures the return a company obtains for each monetary unit invested by shareholders. It is calculated by dividing net income by the net worth of the company and is expressed as a percentage.

The formula for calculating ROE is:

ROE = (Net Income / Net Equity) x 100%

For example, if a new company has a net income of $100,000 and a net worth of $500,000, then the ROE would be:

ROE = (100,000 / 500,000) x 100% = 20%

This means that the company achieved a return of 20% on shareholders' invested equity.. It is important to note that ROE is not an absolute measure of profitability and should be compared to the ROE of other companies in the same sector or industry to assess their relative financial performance. It is also important to consider other factors such as financial leverage and business risk before making investment decisions based on ROE.

Practical examples of roe calculation

Of course, here are some practical examples of how to calculate ROE:

EXAMPLE 1:

Suppose a company makes a net profit of 200,000 euros and has equity of 2,500,000 euros. The ROE would then be:

• ROE = (Net profit / Equity) x 100%.
• ROE = (200,000 / 2,500,000) x 100%.
• ROE = 8%.

EXAMPLE 2:

Now, consider a company that has a net profit of 150,000 euros and equity of 1,000,000 euros. In addition, it has obtained a bank loan of 500,000 euros. In this case, the ROE would be calculated as follows:

• ROE = (Net profit / Equity) x 100%.
• ROE = (150,000 / 1,000,000) x 100%.
• ROE = 15%.

It is important to note that bank lending is not taken into account in calculating ROE, as only return on equity is being measured.

EXAMPLE 3:

Finally, let us assume that a company has made a net profit of 300,000 euros and has equity of 2,000,000 euros. However, the company has issued shares worth €500,000. In this case, the ROE would be calculated as follows:

• ROE = (Net profit / Shareholders' equity) x 100%
• ROE = (300,000 / (2,000,000 - 500,000)) x 100%
• ROE = 20%

The issue of shares is taken into account here as an increase in the company's equity.