Return on Equity (ROE) is a financial ratio that describes the ability of its own capital (equity) to get net profit. In other words ROE can describe the of the company's ability to generate profits for shareholders, so that this ratio can be the attraction of investors to invest in the company.
The equation can be used to calculate a company's ROE is as follows (Keown et.al, 2008):
The equation can be used to calculate a company's ROE is as follows (Keown et.al, 2008):
ROE = Net Income / Equity
ROE influence on stock return
Results of the study Jauhari (2003)1 proved that the ROE has a significant positive influence on stock return. With the increasing value of ROE will give a fairly good signal to investors and prospective investors that the company is able to use the equity they have to generate income or profit.
However Sasongko & Wulan (2006)2 found a different relationship. Where the results of his research found that profitability ratios like ROA and ROE does not affect the stock price. This means that ROA and ROE can not be used to determine the value of the company.
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1. Jauhari, Robertus Tri Brata. 2003 (Analysis of the influence of debt to equity ratio, price to book value, return on equity, price to earnings ratio and dividend payout ratio on stock return). Accounting master's thesis. Diponegoro University, Semarang.
2. Sasongko, Noer & Wulandari, Nila. 2006 (Effect of EVA and profitability ratios to the stock price). Empirika, Vol. 19 No. 7, Juny 2006.
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