Also known as return on net worth, a company's return on equity (ROE) is a common metric used by investors to analyze profitability. Expressed as a percentage, ROE is calculated by dividing a company's' net income for the previous year by its shareholders' equity. For example, if a company has net income of $1 million and total shareholders' equity of $10 million, return on equity equals 0.1, or 10%. Investors can use this calculation to determine profitability as well as efficiency, as the ratio explains how many dollars of profit can be generated from a specific level of equity invested by shareholders. In most industries, a higher ROE makes the company more attractive for investors.
Average Return on Equity for the Financial Services Industry
The financial services industry makes up a substantial portion of the national gross domestic product (GDP), and, as such, is of interest to growth and value investors. Companies under the financial services industry operate in sectors such as consumer and business banking, credit services and loans, asset management as well as regional and national level investment brokerage services. Understanding the ROE for companies in the financial services industry is important in determining whether investment in the sector is an appropriate allocation within an investor's portfolio.
The financial services industry has an average ROE of 7.79% as of February 2015. The industry average is compiled for a wide sample of more concentrated financial services sectors including savings and loans companies with an average ROE of 7.20%, national level investment brokerage operations with an average ROE of 8.4%, and credit services firms with an average ROE of 18.1%. Companies operating in the insurance brokerage field and asset management have the highest ROE averages, at 18.1% and 20.6% respectively, while companies operating in health care real estate investment trusts (REITs) have the lowest at 5.4%.