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Return On Equity (ROE)

What is return on equity? Return on Equity measures the return from shareholder’s equity. By definition, ROE is the Shareholder’s rate of return on every dollar shareholder’s invested in a company. Return on Equity also can be measured as percentage of income for shareholder’s equity. Return on Equity is calculated by taking a year’s worth of net income and dividing them by average shareholder equity for that year. Generally, net income is taken from a company’s income statement and shareholder’s equity from balance sheet.

Importance

Return on equity is the ammunition for investors in understanding how the executive team balances a company’s equity to return profit to its shareholders. A higher ROE generally indicates well management of company’s shareholders’ equity where a low ROE indicates a poor management style. However, to fully understand a company’s performance we need to compare the ratio to industry average.

Use the ROE calculator on the top calculate return on equity. However, below is an example of Return on Equity.

Example:

In 2007 a company has net income of $1 million and the company has $6 million of shareholders. What is the company’s Return on Equity.

Return on Equity is calculated by dividing Net Income by Shareholders’ equity.
Return on Equity = Net Income $1,000,0000/$6,000,000 = .167 or 16%.

Suggested Calculators

Depreciation – Use the calculator to figure out different types of depreciation.
Break Even Analysis – Use the calculator to figure out break even analysis.

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