RETURN ON EQUITY RATE- INDICATOR FOR MEASURING PROFITABILITY IN RELATION TO ITS EQUITY

Ecobici Mihaela Loredana
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Ecobici Mihaela Loredana: CONSTANTIN BRANCUSI UNIVERSITY OF TARGU-JIU

Annals - Economy Series, 2025, vol. 4, 184-188

Abstract: We know that any business uses its own capital to generate profit, and in this sense return on equity both shows and reflects the level of performance of the developing business. In other words, return on equity shows the degree of efficiency of its use in generating profit. Return on equity is one of the most important financial indicators that measures a company's ability to produce profit from the use of capital invested by shareholders. To calculate it, we need 2 important elements: net income, namely gross income and equity. In general, a favorable situation for the company is when the value of the ratio increases, but this ratio can also increase when the company assumes a large volume of debt. The purpose of this article is to highlight the importance that a company must give to this indicator, at the same time representing an essential tool for both investors and company management. Considering this aspect, return on equity offers a number of benefits such as: it quantifies the monetary unit invested by shareholders, it evaluates the degree of performance of the company in comparison with other companies in the same branch, it reflects the performance of the management and is a decision-making tool for investments, it provides information regarding risk assessment. A consistently high return on equity indicates that the firm has been consistently profitable, which denotes sound management based on effective management strategies. Research in the field has shown the importance of this indicator in managing financial resources and evaluating the efficiency achieved, highlighting its correlations with investment strategy.

Keywords: financial rate of return; efficiency; equity; net profit; gross profit; financial analysis (search for similar items in EconPapers)
Date: 2025
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