Return on Equity (ROE) Calculator

Calculate return on equity to measure company profitability relative to shareholders' equity.

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What is Return on Equity (ROE)?

Return on Equity (ROE) is a financial ratio that measures how effectively a company uses shareholders’ equity to generate profits.

ROE is calculated by dividing net income by shareholders’ equity and multiplying by 100 to express it as a percentage. It indicates how much profit a company generates for each dollar of shareholders’ equity.

A higher ROE generally indicates that a company is more efficient at generating profits from its equity base. However, it’s important to compare ROE with industry benchmarks and consider the company’s debt levels, as high leverage can artificially inflate ROE.

ROE is a key metric for investors and analysts when evaluating company performance and making investment decisions. It helps assess management’s effectiveness in using shareholder funds to create value.

Return on Equity (ROE) Formula

\begin{gather*}\bold{Given{:}}\newline\begin{aligned}\text{Net Income} &= \mathrm{NI}\newline\text{Shareholders' Equity} &= \mathrm{SE}\end{aligned}\newline\bold{Calculate{:}}\newline\text{Return on Equity} = \mathrm{ROE} \newline = \frac{\mathrm{NI}}{\mathrm{SE}} \times \mathrm{100{\%}}\end{gather*}

Return on Equity (ROE) Calculation Examples

Example 1

A company reports net income of $150,000 with total shareholders' equity of $1,000,000.

Let's calculate the return on equity for this company:

\begin{gather*}\bold{Given{:}}\newline\begin{aligned}\text{Net Income}\space(\mathrm{NI}) &= \mathrm{{\$}150{,}000}\newline\text{Shareholders' Equity}\space(\mathrm{SE}) &= \mathrm{{\$}1{,}000{,}000}\end{aligned}\newline\bold{Calculate{:}}\newline\text{Return on Equity}\space(\mathrm{ROE})\newline\begin{aligned}&= \frac{\mathrm{NI}}{\mathrm{SE}} \times \mathrm{100{\%}}\newline&= \frac{\mathrm{{\$}150{,}000}}{\mathrm{{\$}1{,}000{,}000}} \times \mathrm{100{\%}}\newline&= 0.15 \times \mathrm{100{\%}}\newline&= \mathrm{15{\%}}\end{aligned}\end{gather*}

This indicates that the return on equity for the company is 15%, meaning that it generates 15% in profit for every dollar of shareholders' equity invested.

Example 2

A manufacturing business has net income of $80,000 and shareholders' equity totaling $500,000.

Let's calculate the ROE for this manufacturing business:

\begin{gather*}\bold{Given{:}}\newline\begin{aligned}\text{Net Income}\space(\mathrm{NI}) &= \mathrm{{\$}80{,}000}\newline\text{Shareholders' Equity}\space(\mathrm{SE}) &= \mathrm{{\$}500{,}000}\end{aligned}\newline\bold{Calculate{:}}\newline\text{Return on Equity}\space(\mathrm{ROE})\newline\begin{aligned}&= \frac{\mathrm{NI}}{\mathrm{SE}} \times \mathrm{100{\%}}\newline&= \frac{\mathrm{{\$}80{,}000}}{\mathrm{{\$}500{,}000}} \times \mathrm{100{\%}}\newline&= 0.16 \times \mathrm{100{\%}}\newline&= \mathrm{16{\%}}\end{aligned}\end{gather*}

This calculation shows that the return on equity for the manufacturing business is 16%, indicating the company's efficiency in generating profits from shareholders' investments.

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