Return on Equity (ROE) Calculator

Calculate Return on Equity (ROE) with our free calculator. Measure how efficiently a company uses shareholder equity to generate profits.

ROE Inputs
$
Company's net profit after taxes
$
Total assets - total liabilities
Additional Options

What Is Return on Equity (ROE)?

Return on Equity (ROE) measures how effectively a company uses its shareholders' equity to generate profit. It helps investors understand how much net income a business earns from the money invested by its shareholders. The return on equity ratio is expressed as a percentage, making it easier to evaluate a company's profitability.

Return on Equity Formula

The return on equity (ROE) formula helps you understand how efficiently a company uses shareholders' money to generate profits. It is calculated by dividing net income by average shareholders' equity and multiplying the result by 100 to get a percentage.

Formula

Return on Equity (ROE) = (Net Income ÷ Average Shareholders' Equity) × 100

To calculate ROE accurately, you need to understand two key components:

  • Net Income: The company's profit after deducting expenses, interest, and applicable taxes from its revenue.
  • Average Shareholders' Equity: The average value of shareholders' equity at the beginning and end of a financial period.

Average Shareholders' Equity Formula

Average Shareholders' Equity = (Beginning Equity + Ending Equity) ÷ 2

Using average shareholders' equity is helpful because a company's equity can change throughout the year due to profits, losses, dividends, or additional share issuance. Since net income represents the profit earned over the entire financial period, using average equity can provide a more representative measure of how efficiently the company used shareholders' funds.

Example of Return on Equity

Suppose a company reports the following financial figures:

  • Net income: $50,000
  • Beginning shareholders' equity: $400,000
  • Ending shareholders' equity: $600,000

First, calculate average shareholders' equity:

Average Equity = ($400,000 + $600,000) ÷ 2 = $500,000

Next, apply the return on equity formula:

ROE = ($50,000 ÷ $500,000) × 100 = 10%

This means the company generated $0.10 in profit for every $1 of average shareholders' equity during the financial period.

A higher ROE may indicate that a company is using shareholders' funds efficiently. However, it is important to compare ROE with companies in the same industry and consider factors such as debt and profitability before evaluating a company's financial performance.

How to Use our Return on Equity (ROE) Calculator

Using the Return on Equity (ROE) Calculator is simple. Enter your company's net income and total shareholders' equity to calculate its return on equity as a percentage.

Follow these steps to get your result:

  1. Enter Net Income ($): Enter the company's net profit after taxes. For example, if the company earned $50,000 after taxes, enter $50,000.
  2. Enter Total Shareholders' Equity ($): Enter the company's total shareholders' equity, which is calculated by subtracting total liabilities from total assets. For example, enter $250,000 if that is the company's total equity.
  3. Show Calculation Breakdown (Optional): Enable this option if you want to see how the calculator works out the result.
  4. Calculate ROE: Click the Calculate button to find the company's return on equity as a percentage.

Frequently Asked Questions (FAQs)

Return on Equity (ROE) is calculated by dividing a company's net income by its average shareholders' equity and multiplying the result by 100. It shows how effectively a company uses shareholders' investments to generate profits.

Not always. A higher ROE can indicate that a company is generating strong profits from its equity. However, high debt or unusually low shareholders' equity can also increase the ratio. It is best to compare ROE with other companies in the same industry.

Average shareholders' equity is generally preferred because net income is earned throughout the year. Using the average equity for the beginning and end of the period provides a more representative measure of the company's profitability.

Yes. ROE can be negative when a company reports a net loss and has positive shareholders' equity. For example, if a company earns a net loss of $50,000 and has average shareholders' equity of $500,000, its ROE is -10%. This indicates that the company incurred a loss relative to its equity.

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