Return On Equity - ROE

A A A

DEFINITION

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares.

Also known as "return on net worth" (RONW).

INVESTOPEDIA EXPLAINS

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income - preferred dividends / common equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period.

Things to Remember
  • If new shares are issued then use the weighted average of the number of shares throughout the year.
  • For high growth companies you should expect a higher ROE.
  • Averaging ROE over the past 5 to 10 years can give you a better idea of the historical growth.
For more on return on equity (ROE) read Are companies with a negative return on equity (ROE) always a bad investment? and ROA And ROE Give Clear Picture Of Corporate Health


VIDEO

RELATED TERMS
  1. Return On Capital Employed (ROCE)

    A financial ratio that measures a company's profitability and the efficiency ...
  2. Profitability Ratios

    A class of financial metrics that are used to assess a business's ability to ...
  3. Return On Average Equity - ROAE

    An adjusted version of the return on equity (ROE) measure of company profitability, ...
  4. Stockholders' Equity

    The portion of the balance sheet that represents the capital received from investors ...
  5. Return On Assets - ROA

    An indicator of how profitable a company is relative to its total assets. ROA ...
  6. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the ...
  7. Return On Gross Invested Capital ...

    The amount that a company earns on the total investment it has made in its business. ...
  8. Cash Flow-to-Debt Ratio

    A ratio of a company’s cash flow from operations to its total debt.
  9. P/E 10 Ratio

    A valuation measure, generally applied to broad equity indices, that uses real ...
  10. Equity Financing

    The act of raising money for company activities by selling common or preferred ...
Related Articles
  1. Looking Deeper Into Capital Allocation ...
    Investing Basics

    Looking Deeper Into Capital Allocation ...

  2. Reverse Engineering Return On Equity
    Options & Futures

    Reverse Engineering Return On Equity

  3. Return On Equity (ROE)
    Forex

    Return On Equity (ROE)

    By Free
  4. ROA And ROE Give Clear Picture Of Corporate ...
    Markets

    ROA And ROE Give Clear Picture Of Corporate ...

  5. How Return On Equity Can Help You Find ...
    Economics

    How Return On Equity Can Help You Find ...

  6. Earnings Power Drives Stocks
    Markets

    Earnings Power Drives Stocks

  7. Equity Valuation In Good Times And Bad
    Bonds & Fixed Income

    Equity Valuation In Good Times And Bad

  8. What is the difference between return ...
    Options & Futures

    What is the difference between return ...

  9. Ratio Analysis Tutorial
    Fundamental Analysis

    Ratio Analysis Tutorial

  10. How do you calculate return on equity ...
    Investing Basics

    How do you calculate return on equity ...

comments powered by Disqus
Hot Definitions
  1. Direct Consolidation Loan

    A loan that combines two or more federal education loans into a single loan. A Direct Consolidation Loan allows the borrower to make a single monthly payment. The loan is facilitated by the U.S. Department of Education and does not require borrowers to pay an application fee.
  2. Through Fund

    A type of target-date retirement fund whose asset allocation includes higher risk and potentially higher return investments "through" the fund's target date and beyond.
  3. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold or disposed of first.
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American dream is achieved through sacrifice, risk-taking and hard work, not by chance.
  5. Texas Ratio

    A ratio developed by Gerald Cassidy and other analysts at RDC Capital Markets to measure the credit problems of particular banks or regions of banks. The Texas ratio takes the amount of a bank's non-performing assets and loans, as well as loans delinquent for more than 90 days, and divides this number by the firm's tangible capital equity plus its loan loss reserve.
  6. Amortized Bond

    A financial certificate that has been reduced in value for records on accounting statements. An amortized bond is one that is treated as an asset, with the discount amount being amortized to interest expense over the life of the bond. If a bond is issued at a discount - that is, offered for sale below its par (face value) - the discount must be treated either as an expense or it can be amortized as an asset.
Trading Center