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Calculate annual RoE for Jensen Analytical Chemicals, when:
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This ratio is an important measure of a company’s profitability. RoE (also known as return on capital) is the ratio of annual net income of a business to its stockholder equity. RoE measures total net income for a reporting period as a percentage of the total value of shareholder investment.
Investors and analysts use RoE to compare company performance. As with many financial ratios, however, RoE is best used to compare companies in the same industry. However, high RoE alone yields no immediate benefit. The benefit comes from the earnings reinvested in the company at a high RoE rate. This in turn gives a company a high growth rate. RoE is irrelevant if earnings are not reinvested.
Higher RoE values are generally favorable. That is, higher RoE values suggest a company is more efficient in generating income on new investments.
Investors should compare the ROE of different companies and check the trend in RoE over time. However, relying solely on ROE for investment decisions is not a safe bet because it can be artificially influenced by company managers.