Course 205: Measuring Returns on Capital
Return on Equity
In this course
1 Introduction
2 Return on Equity
3 Why Return on Equity Matters
4 ROE and Internet Stocks

The way analysts usually measure return on capital for publicly traded companies is return on equity, or ROE. This is calculated by dividing net earnings by shareholders' equity. Shareholders' equity, or equity capital, is equal to total assets minus total liabilities. That is the part of the company owned by stockholders--the capital they have invested in the company. Dell Computer DELL earned an incredible 63% on its equity capital in 1999. In other words, for every $1 of shareholder money invested in the firm, Dell generated an annual profit of $0.63. Be careful, though. It's easier to post a large ROE in a single year than it is to maintain that large ROE over a longer period. Oil driller EOG Resources EOG, for example, earned 58% on its equity in 1999, but if you average the company's ROEs over the five-year period from 1995 to 1999, the figure drops to a much less impressive 19%. It's that long-term return on capital that we're interested in.

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