What is Return on Equity (ROE)?
Return on equity (ROE) is a profitability ratio that measures how much net profit a company generates for every unit of shareholders’ equity. It is a key indicator of how efficiently management uses the owners’ capital to produce returns. The DuPont model decomposes ROE into margin, turnover, and leverage drivers.
How It Works
- Calculate net income attributable to common shareholders.
- Determine average shareholders’ equity (opening + closing balance / 2).
- Divide net income by average equity and express as a percentage.
- Compare ROE to peers, industry benchmarks, and the company’s cost of equity.
Saudi Context
Saudi investors and CMA-licensed analysts use ROE to compare Tadawul-listed companies across sectors. Saudi banks, insurance companies, and Vision 2030 corporates target sustained double-digit ROE. SAMA monitors bank ROE under its supervisory framework and Basel III capital requirements.
Example
A Saudi listed company earns SAR 200 million net profit on an average equity of SAR 1.25 billion. ROE = SAR 200M / SAR 1,250M = 16%, in line with the Tadawul large-cap sector average.