Why do investors and analysts spend so much time on Return on Equity (ROE)?
Return on Equity actually tells us that how much return the investors have received on their investment that they made in form of equities. In other words we can say that return on equity is actually a profitability measure through which we can understand that how effectively the company has used the equities that is invested by the investors in order to generate the profit.
ROE is arrived by dividing the net income by shareholders equities, thus it tells us that if net income is lower and gross income is more then there are huge indirect expenses such as SG&A, Commissions are being incurred hence we have to control them in order to ahcieve the better ROE, hence we can say that investors and anlyst spend so much time on ROE since it can clearly tell that where exactly the need is to control the things and the efficiency of the company in generating the profit. It can pinpoint where exactly the efforts have to be accumulated to make the company more profitable and to increase the wealth of the share holders. Hence most of the time goes in analysing ROE.