Return on Equity Calculator
Calculate return on equity (ROE) using net income and average shareholder equity to measure how effectively a business generates profit from its owners' equity.
Calculate Return on Equity
Enter net income and beginning and ending shareholder equity for the same reporting period.
What Is a Return on Equity Calculator?
A Return on Equity Calculator measures how much net income a company generates relative to shareholder equity. Return on equity is commonly abbreviated as ROE and is an important profitability ratio used by investors, analysts, business owners, and financial professionals.
ROE helps show how effectively a company uses the capital attributable to shareholders to generate profits.
Average shareholder equity is usually calculated from beginning and ending equity balances for the financial period being analyzed.
How to Use the Return on Equity Calculator
1. Enter Net Income
Enter the company's net income for the financial reporting period.
2. Enter Equity
Enter beginning and ending shareholder equity for the same period.
3. Calculate ROE
Click calculate to see average shareholder equity and the ROE percentage.
How Does the ROE Calculation Work?
The calculator first finds average shareholder equity by adding beginning equity and ending equity and dividing the result by two. Net income is then divided by average shareholder equity and multiplied by 100 to express the result as a percentage.
Return on Equity Example
| Financial Item | Amount |
|---|---|
| Net Income | $120,000 |
| Beginning Shareholder Equity | $700,000 |
| Ending Shareholder Equity | $900,000 |
In this example, the business generates approximately $15 of net income for every $100 of average shareholder equity.
How to Interpret Return on Equity
A positive ROE means the company generated positive net income relative to shareholder equity. A negative result can occur when a company reports a net loss or has negative shareholder equity.
| ROE Result | General Interpretation |
|---|---|
| Negative ROE | May indicate a net loss or negative shareholder equity. The underlying financial figures should be reviewed carefully. |
| 0% | The company generated no net income relative to average shareholder equity. |
| Positive ROE | The company generated positive net income relative to shareholder equity. |
| Higher Positive ROE | Generally indicates more profit generated for each unit of shareholder equity. |
Why Is Return on Equity Important?
Return on equity provides insight into how effectively management uses shareholder capital to generate earnings. Investors often use ROE when evaluating profitability and comparing similar businesses.
Tracking ROE over several financial periods may help identify whether profitability relative to equity is improving, declining, or remaining stable.
ROE should not be considered alone because financial leverage can significantly affect the result. A company may produce a high ROE partly because its shareholder equity is relatively low compared with its liabilities.
Return on Equity vs. Return on Assets
ROE and ROA are both profitability ratios, but they measure returns relative to different parts of a company's financial structure.
Return on Equity (ROE)
ROE measures net income relative to shareholder equity.
Return on Assets (ROA)
ROA measures net income relative to the company's total asset base.
ROE focuses more directly on returns attributable to shareholder capital, while ROA evaluates how efficiently the overall asset base generates profit.
Factors That Can Affect ROE
Several financial factors can influence a company's return on equity. These include profitability, debt levels, retained earnings, share repurchases, new equity issuance, asset efficiency, and operating performance.
Financial Leverage
Debt can influence ROE because borrowing may allow a company to operate with less shareholder equity. This means a high ROE does not automatically indicate low financial risk.
Profitability
Higher net income, assuming equity remains relatively stable, will generally increase ROE.
Changes in Shareholder Equity
Share repurchases, retained earnings, dividends, new share issuance, and accumulated losses can all affect shareholder equity and therefore ROE.