ROE refers to Return on Equity. As the name suggests, this is a ratio which is used to determine the return which is available to equity holders, after all the operational and fixed expenses have been paid off by the company in relation to their equity, i.e. Net Profit / Equity
Needless to say, ROE should be greater than the company’s cost of capital for it to generate sustainable cash flows and ultimately drive valuation. Also, higher this ratio over a period of time, higher would be the chance for investors to generate wealth, provided ROE is on due to margins and sales turnover and not on account of high leverage.
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