Return on equity (ROE)

BDC says return on equity measures how well the business is doing in relation to the investments made. BDC adds that it can be useful for a business to examine its own return on equity over time. It draws on both the income statement and the balance sheet. The guide on what buyers look for in your financial statements puts it in context.

The profit figure differs by source

BDC calculates it by dividing earnings after taxes by total shareholders’ equity. Statistics Canada calculates it as the ratio of net income to total equity. Innovation, Science and Economic Development Canada reports a measure it calls net profit to equity, which it also describes as return on equity, and its net profit is recorded before income taxes. Check which definition a figure uses before comparing two figures with the same name.

What to check or ask

• Which profit figure and which equity figure the ratio uses, and whether it is before or after tax
• Which date the equity figure is taken from, since it comes from the balance sheet
• How the ratio compares with the debt carried (see debt-to-equity ratio)