Return on equity (ROE)—Calculator (2024)

You can use several ratios to analyze the profitability of your business.

The most commonly used indicators are the return on shareholders’ equity ratio,  gross profit margin, return on common shareholders’ equity, net profit margin and the return on total assets ratio.

Another is the return on equity (ROE) ratio, which indicates how much profit the company generates for each dollar of equity.

What is return on equity (ROE)?

“The return on equity ratio is a profitability ratio,” explains Dimitri Joël Nana, Director, Portfolio Risk at BDC. In other words, it assesses how effectively you and your management team use equity to generate profits.

More specifically, the return on equity ratio measures the company’s profits compared to its shareholders’ investment.

Return on equity formula

The return on equity ratio is calculated by dividing earnings after tax (EAT) by shareholders’ equity. The mathematical formula is as follows:

Example of return on equity calculation

Let’s say that ABC Co. has $400,000 in shareholders’ equity and $600,000 in debt, totalling $1,000,000 in assets, and that earnings after tax total $50,000.

The shareholders’ equity consists of four sub-components, namely common shares, preferred shares, contributed capital and retained earnings, as follows:

  1. Common shares: $200,000
  2. Preferred shares: $100,000
  3. Contributed capital: $50,000
  4. Retained earnings: $50,000

We then obtain the return on equity ratio by dividing EAT ($50,000) by shareholder equity (i.e. $400,000, or $200,000 + $100,000 + $50,000 + $50,000) as follows:

Interpreting your return on equity

Calculating your own company’s return on equity ratio can help you better understand and ultimately improve your company’s financial performance, explains Nana. All things being equal, investors prefer to invest in companies that have a high ratio.

As with many other ratios, the return on equity ratio is usually used to perform two types of analyses:

1. Time analysis: To examine your own ratio’s development over time

2. Competitive analysis: To compare your ratio to that of similar companies

“On its own, out of context, the calculation’s result means little. For it to be really useful, you either have to make historical comparisons with your previous ratio or compare your ratio with that of similar companies in your industry,” says Nana.

What is a good return on equity?

While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good. At 5%, the ratio would be considered low.

How do you calculate and analyze return on equity when total equity is negative?

Unlike other ratios, such as the return on assets ratio, the denominator of the return on equity ratio, that is to say the shareholders’ equity, can be negative.

This means that a positive ratio can actually be misleading.

For example, let’s assume a company has equity of -$1,000,000 and negative after-tax earnings of -$100,000.

“The ratio will then be positive, since we are dividing one negative number by another. We might think at first glance that everything is going well, but it’s not. The person conducting the analysis is responsible for checking whether the equity is negative,” says Nana.

If the denominator shareholders’ equity is negative, then the indicator should be interpreted in reverse; the lower the ratio, the better. A ratio of -12.5% is therefore better than a ratio of -5%.

What are the limits of return on equity?

The return on equity ratio only provides a rough idea of a company’s performance and financial health, explains Nana. For this reason, you should avoid limiting your analysis to the calculation of this ratio alone.

If ABC'S return on equity is 20%, while that of its competitor, XYZ, is 5%, we may at first consider ABC to be in a better financial position.

However, the return on equity does not provide information on debt. “The ratio shows that ABC generates a lot of revenue based on shareholder equity, but this may only be because it is over-leveraged,” says Dimitri Joël Nana.

To get a better overview, which would take into account the debt of both companies, we would have to calculate the return on total assets ratio.

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Return on equity (ROE)—Calculator (2024)


How to calculate return on equity ROE? ›

ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits. To calculate ROE, divide net income by the value of shareholders' equity.

What number of ROE is good? ›

ROE is used when comparing the financial performance of companies within the same industry. It is a measure of the ability of management to generate income from the equity available to it. A return of between 15-20% is considered good. ROE is also used when evaluating stocks, as well as other financial ratios.

Can ROE exceed 100%? ›

The RoE can be more than 100 if the income is greater than the equity.

Can ROE be zero? ›

Yes, a company can have a negative ROE. Such companies yield zero returns. A negative ROE can be a result of the company having negative shareholder equity because its liabilities currently exceed its assets at a particular time.

What is the average return on equity ROE? ›

As with return on capital, a ROE is a measure of management's ability to generate income from the equity available to it. ROEs of 15–20% are generally considered good. ROE is also a factor in stock valuation, in association with other financial ratios.

What is a good ROE for banks? ›

Generally speaking, a ROE greater than 10% is considered good, and higher is better. And higher ROE numbers can justify a higher price/book valuation. Breaking earnings power down further, you can look at net interest margin and efficiency. Net interest margin measures how profitably a bank is making investments.

Is 50% ROE good? ›

However, as a general rule, a higher ROE is considered better because it indicates that a company generates more profits per unit of shareholder equity. ROE values above 15% are generally considered good, while those above 20% are frequently regarded as excellent.

Is 30% a good ROE? ›

On average, the solid Return on Equity ratio in tier-1 economies is about 10-12%. In countries with higher inflation, the indicator should be higher too – about 20-30%. To assess investment attractiveness, one can compare the ROE ratio of the chosen company with investments in such instruments as bonds or deposits.

What is a bad ROE percentage? ›

ROE When Net Income Is Negative

When net income is negative the resulting percentage is negative, which is always considered bad. If both net income and equity are negative the resulting ratio might be artificially inflated and misleading.

Which company has the highest ROE? ›

High RoE stocks
S.No.NameROE %
2.Addictive Learn333.16
3.Hindustan Motors696.44
4.Ksolves India147.16
23 more rows

What is the rule of thumb for ROE? ›

While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good.

What if ROE is too high? ›

ROE tells us about a company's profitability and how effectively it makes money. A good ROE indicates effective production. However, an extremely high ROE can be an indicator of problems like excessive debt and inconsistent profit. A low ROE metric ratio indicates the bad shape of the company.

What is the formula for return on common equity ROE? ›

ROE = Net Income / Shareholders' Equity

A sustainable and increasing ROE over time can mean a company is good at generating shareholder value because it knows how to reinvest its earnings wisely, so as to increase productivity and profits.

How do you calculate ROE cost of equity? ›

Under this model, Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return – Risk-Free Rate of Return).

How do you calculate ROE and ROI? ›

ROI is calculated by dividing net profit after taxes by total assets. ROE is net profit after taxes divided by the total equity and shareholders.

What is the formula for return on average equity? ›

2. How is the return on average equity ratio calculated? To calculate the return on average equity ratio, divide the net income by the average shareholders' equity.

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