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Financial education 30 Jan 2020

What is ROE?

ROE stands for “Return on Equity” and is the most used measurement of a company’s profitability. It is calculated by dividing the company’s net income by shareholder equity (or the company’s assets minus its debt).

Traditionally, ROE is the metric most used to indicate a a bank’s — or any other company’s — profitability. The greater the ROE, the more effectively the company is using its own assets to create profits.

ROE is closely watched by investors because it determines a company’s capacity to generate value for its shareholders, especially when compared to its cost of capital. The cost of capital would be determined by the minimum profitability theoretically required by an investor in order to assume the risk of investing in a company. Consequently, the more the ROE exceeds the cost of capital, the greater the creation of shareholder value.

With the last published data (through the close of Q4 2019), BBVA had a ROE of 9,9 percent, significantly above the 5,9 percent average for its European peer group.

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