Return on Equity (ROE) is the first thing an investor must look at while analysing a company. It is the returns earned by investors for every unit of invested capital. ROE ratio is one of the most important financial ratios used by investors worldwide to analyse stocks. It helps them understand how much profit a company is able to generate for its equity shareholders.
Knowing this is important as equity shareholders aren’t the only investors in a company. A company also raises capital via preference shares and debt. Creditors and preference shareholders have the first claim on a company’s profits. Whereas equity shareholders are paid last.