Meaning: It is the ratio of net profit after interest and tax and owner’* investment. Significance: The significance of computing this ratio is to find out how efficiently the owners funds supplied by the shareholders/owners are being used. Example, if Sushmita the owner of a grocery shop has an equity stake of Rs 70,000 in the business, she has borrowed Rs 30,000 (rate of interest is 10%).
This will attract an interest of 3,000 @ 10% per annum.
If the Net Profit is Rs 14,000 then:
ROE=Rs 14,000/Rs 70,000 x 100 =20%
