Return on equity (ROE)

Return on equity is a measure of a company's profitability, the term is synonymous with return on shareholders capital.

Equity is the capital provided by shareholders. The performance measure used to calculate the return on equity is the operating profit plus financial profit, also called income after financial items.

Return on equity = (operating profit + financial profit) / adjusted equity
Adjusted equity = shareholders' equity + (1 - corporate tax rate) * untaxed reserves

Untaxed reserves may exist in annual reports for individual companies, untaxed reserves do not exist in consolidated financial statements because the division into an equity component and a debt component is made when the consolidated financial statements are prepared.

A company can increase the return on equity by increasing the proportion of debt in the company, provided that the return on assets is higher than the loan rate. A company can increase the proportion of liabilities by taking up more loans or by distributing capital to shareholders.