1. What is Return on Equity (ROE) for Loans?

Definition: ROE measures the profitability of a leveraged investment by showing how much profit is generated from the equity invested.

Purpose: It helps investors evaluate the efficiency of their capital in leveraged loan scenarios.

2. How Does the ROE Calculator Work?

The calculator uses the formula:

Where:

• \( ROE \) — Return on Equity (percentage)
• \( Net\ Income \) — Total income before interest and taxes ($)
• \( Debt\ Interest \) — Interest paid on debt ($)
• \( Equity \) — Amount of equity invested ($)

Explanation: The formula shows what percentage return the equity investment is generating after accounting for debt costs.

3. Importance of ROE Calculation

Details: ROE is crucial for assessing investment performance, comparing different leveraged opportunities, and making financing decisions.

4. Using the Calculator

Tips: Enter the net income, debt interest payments, and equity amount. All values must be positive numbers, with equity > 0.

5. Frequently Asked Questions (FAQ)

Q1: Why subtract debt interest from net income?
A: This isolates the portion of income attributable to the equity investment after servicing debt.

Q2: What's a good ROE for leveraged loans?
A: This varies by industry and risk, but generally 15%+ is considered good for leveraged investments.

Q3: How does leverage affect ROE?
A: Leverage magnifies ROE - it increases when investments perform well but can turn negative if performance is poor.

Q4: Should I use pre-tax or after-tax net income?
A: Typically use after-tax income for personal investments and pre-tax for corporate analysis.

Q5: What if my ROE is negative?
A: A negative ROE means the investment is losing money after accounting for debt costs.