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return on equity

It’s the amount of money a company makes in profit as a percentage of the money that shareholders have invested in it. So, if a barber invests $100,000 in his barber shop and makes $30,000 profit after a year of business, then he’s made a 30% “return on his equity.” Its commonly used by banks as a measure of their profitability. For example, a small bank might make $100 million with their $1 billion of shareholders’ money while a large bank perhaps makes $500 million with $10 billion of shareholders’ money. The larger bank is making more money in absolute terms but the smaller bank is more profitable (in other words, investors would probably rather invest with the smaller bank). In that sense, it allows for different sized banks to be compared to one another.

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