ROE is considered a measure of how effectively management is using a company’s assets to create profits. ROE is expressed as a percentage and can be calculated for any company if net income and equity are both positive numbers. Net income is calculated before dividends paid to common shareholders and after dividends to preferred shareholders and interest to lenders. Return on equity is a profitability ratio, measures of the profitability that calculates how many profit generates the company with each dollar of shareholders equity. The ratio is a measure how good a company uses investments to generate earnings growth. Net income over the last full fiscal year, or trailing 12 months, is found on the income statement—a sum of financial activity over that period. Shareholders' equity comes from the balance sheet—a running balance of a company’s entire history of changes in assets and liabilities. It is considered best practice to calculate ROE based on average equity over the period because of this mismatch between the two financial statements.
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