Return on Equity, also known as Return on Networth or Return on Shareholders Funds, indicates profitability of a company by measuring how much the shareholders earned for their investment in the company. The higher the percentage, the more efficiently equity base has been utilized, indicating better return to investors.
RoE is ratio of net income (available for equity shareholders) to average shareholders' equity.
RoE = Profit After Tax / (Equity Share capital + Free Reserves – Miscellaneous Expd.)
E.g. If net profit is Rs.100 crore, Equity share capital is Rs.100 crore, Reserves and Surplus is Rs.900 crore, Miscellaneous Expd. Nil
RoE = 100 / (100 + 900)
Return on Equity is 10%.