Return on equity, or ROE, shows how much profit a company generates for each rupee of shareholders’ equity. It is calculated by dividing the net profit after tax by the average or year-end shareholders’ equity, and it is quoted as a percentage. ROE is popular because it captures the efficiency with which management uses the owners’ money to grow the business. A company with an ROE of 18 percent earns Rs 18 on every Rs 100 invested by shareholders, including past retained profits. To judge it properly, look at the trend for several years instead of a single year, compare it with peers in the same sector, and check how debt affects it. The DuPont breakdown separates ROE into profit margin, asset turnover and financial leverage, which helps reveal whether it is driven by operations or by borrowing. A high ROE that depends on large debt is riskier than one built on high margins. In an IPO, the equity base grows after fresh shares are issued, so the post-issue ROE may dip unless profits rise as well. IPO Bulletin shows ROE from the RHP in the key financials with the years covered.
Example: A firm earns Rs 45 crore on average equity of Rs 250 crore, giving an ROE of 18 percent. If it borrows heavily and its equity shrinks to Rs 150 crore with the same profit, ROE rises to 30 percent, but with more risk.