Return On Equity Calculation

Return on Equity Formula:

\[ ROE = \frac{\text{Net Income}}{\text{Average Shareholders' Equity}} \]

Return on Equity (ROE):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Return on Equity?

Return on Equity (ROE) is a financial ratio that measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. It is expressed as a percentage and calculated as net income divided by average shareholders' equity.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

\[ ROE = \frac{\text{Net Income}}{\text{Average Shareholders' Equity}} \times 100\% \]

Where:

Net Income — Company's total earnings after all expenses and taxes
Average Shareholders' Equity — Average of beginning and ending equity for the period

Explanation: ROE indicates how effectively management is using shareholders' funds to generate profits. Higher ROE values generally indicate more efficient use of equity capital.

3. Importance of ROE Calculation

Details: ROE is a crucial metric for investors to assess a company's profitability and efficiency in generating returns on equity investment. It helps compare performance across companies and industries, and is used to evaluate management effectiveness.

4. Using the Calculator

Tips: Enter net income and average shareholders' equity in the same currency units. Both values must be positive numbers. The calculator will automatically convert the result to a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE percentage?
A: Generally, ROE above 15% is considered good, but this varies by industry. Compare with industry averages and historical performance.

Q2: How is average shareholders' equity calculated?
A: Average equity is typically calculated as (Beginning Equity + Ending Equity) / 2 for the period being measured.

Q3: Can ROE be too high?
A: Extremely high ROE may indicate excessive leverage (high debt levels) rather than operational efficiency, which could be risky.

Q4: How does ROE differ from ROI?
A: ROE focuses specifically on returns generated from shareholders' equity, while ROI measures returns on all invested capital including debt.

Q5: What limitations does ROE have?
A: ROE can be manipulated through share buybacks or high debt levels, and doesn't account for risk or the time value of money.