Return on Equity Calculator

What is return on equity?

ROE, short for return on equity, tells you how many cents of profit a company earns each year for every dollar its shareholders have invested in it. It is net income divided by shareholders' equity, shown as a percentage. An ROE of 15% means the owners' capital produced a profit equal to 15% of its book value.

Investors use ROE to judge how well management turns the owners' money into earnings, and to compare companies in the same industry. Because it is a ratio, it lets a small firm and a large one be set side by side.

The ROE formula

ROE = net income ÷ shareholders' equity × 100

Net income comes from the income statement and covers a full period, normally a year. Shareholders' equity comes from the balance sheet: total assets minus total liabilities. Both must refer to the same company and the same time span.

Equity changes during the year as profits are retained, dividends are paid and shares are issued or bought back. To smooth this out, many analysts divide by the average equity, (opening equity + closing equity) ÷ 2. For example, equity of $1,400,000 at the start of the year and $1,600,000 at the end gives an average of $1,500,000.

How to calculate ROE with this tool

1. Enter net income for the period, in dollars. This can be a reported figure or a forecast.
2. Enter the value of equity: the book value of common shareholders' equity, or the average for the year.
3. Press Calculate. The result is shown as a percentage with two decimals, and whole values appear without decimals.

Both fields require a value of at least 1. A loss or negative equity makes the ratio hard to interpret, so the calculator is intended for profitable companies with positive equity.

Worked example

A company earns $250,000 in a year. Its equity was $1,400,000 at the start and $1,600,000 at the end, so average equity is $1,500,000.

• Divide: 250,000 ÷ 1,500,000 = 0.16667.
• Multiply by 100: ROE = 16.67%.

Had you used the closing equity only, the ratio would be 250,000 ÷ 1,600,000 = 15.63%. Neither is wrong, but you should use the same choice for every company or year you compare.

Breaking ROE down: the DuPont identity

ROE can be split into three drivers, which shows why two firms with the same ROE can be very different businesses:

ROE = net margin × asset turnover × equity multiplierNet margin = net income ÷ sales. Asset turnover = sales ÷ assets. Equity multiplier = assets ÷ equity.

Take two companies that each earn $90,000 on $1,200,000 of sales and hold $2,000,000 of assets. Both have a 7.5% net margin and 0.6 asset turnover. Company A is funded with $750,000 of equity (the rest is debt), Company B with $1,500,000.

Borrowing raised A's ROE, but it also raised its risk. A high ROE built on heavy debt is not the same as one earned through strong margins or efficient use of assets.

How to interpret ROE

• Compare within an industry. Typical levels differ widely between banks, retailers and technology firms.
• Look at several years. One strong year can come from a one-off gain; consistency is more telling.
• Check leverage. Pair ROE with a debt measure, or look at return on assets, which is not inflated by borrowing.
• Watch for shrinking equity. Large buybacks or accumulated losses reduce the denominator and can push ROE up without any improvement in profit.
• Growth link. The share of profit a company keeps (retention ratio) multiplied by ROE gives a rough sustainable growth rate: 12% ROE with 60% of profit retained suggests about 7.2% growth funded internally.

Related return ratios

• Return on assets measures profit against all assets, regardless of how they are financed.
• ROIC measures operating profit against the capital invested in the business.
• Return on sales shows operating profit as a share of net sales.
• ROI compares the gain from a single investment with its cost.

Results are calculations from the figures you enter, not investment advice. See our disclaimer.