Return on equity calculator
This return on equity calculator divides net income by shareholders’ equity. Example: 120,000 of profit on 800,000 of equity gives an ROE of 15%.
Example: Equity basis: Equity at period end · Net income 120,000 · Shareholders’ equity 800,000 → Return on equity: Return on equity (ROE) = 15%. Source: Wikipedia – Return on equity. Updated: .
How it is calculated
Return on equity (ROE) measures how much net income a company earns relative to the equity invested in it. It is stated as a percentage and is one of the best-known ratios in financial statement analysis.
Formula
ROE = net income ÷ shareholders’ equity. To smooth out movements during the year, many analysts use the average of opening and closing equity instead of the year-end figure. In the DuPont breakdown the ratio equals net margin × asset turnover × equity multiplier, so a high ROE can also be driven by heavy borrowing.
Example
A company reports net income of 120,000. Equity was 700,000 at the start of the year and 900,000 at the end. The average is 800,000, so ROE = 120,000 ÷ 800,000 = 15%. Using the year-end figure of 800,000 gives the same result.
- With equity of zero or less the ratio cannot be interpreted sensibly.
- Comparisons only work within similar industries and on the same calculation basis.
Frequently asked questions
How do you calculate return on equity?
Divide net income by shareholders’ equity and multiply by 100. With 120,000 of profit and 800,000 of equity that is 15%.
Should I use year-end equity or average equity?
Both are common. Average equity reflects that capital worked throughout the year; year-end equity is simpler. What matters is using the same basis when you compare figures.
What is a good return on equity?
There is no universal answer. Double-digit percentages are often quoted as a rule of thumb, but industry, leverage and the economic cycle change the picture a lot.
Sources and legal basis
- Wikipedia – Return on equity
- Wikipedia – Eigenkapitalrentabilität
- Brealey, Myers, Allen: Principles of Corporate Finance – Financial Analysis (ROE and DuPont decomposition)
As of: · Editorial policy
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