Return On Equity - ROE

Loading the player...

What is 'Return On Equity - ROE'

Return on equity (ROE) is 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).

BREAKING DOWN 'Return On Equity - ROE'

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

RELATED TERMS
  1. Return On Average Equity - ROAE

    An adjusted version of the return on equity (ROE) measure of ...
  2. DuPont Analysis

    A method of performance measurement that was started by the DuPont ...
  3. Shareholder Equity Ratio

    A ratio used to help determine how much shareholders would receive ...
  4. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
  5. DuPont Identity

    An expression that breaks return on equity (ROE) down into three ...
  6. Shareholder Value Transfer - SVT

    A metric intended to guide shareholders in how much equity compensation ...
Related Articles
  1. Economics

    How Return On Equity Can Help You Find Profitable Stocks

    It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in.
  2. Markets

    Profitability Indicator Ratios: Return On Equity

    By Richard Loth (Contact | Biography)This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures ...
  3. Stock Analysis

    Analyzing UPS's Return on Equity (ROE) (UPS)

    Learn about UPS's return on equity (ROE), an important metric for investors. It is useful to compare the historical ROE and in relation to peers.
  4. Stock Analysis

    Analyzing BP's Return on Equity (ROE)

    Examine the return on equity (ROE) for British Petroleum, the slumping international energy company that seems to be falling behind its competitors.
  5. Professionals

    Return on Equity and the Dupont System

    CFA Level 1 - Return on Equity and the Dupont System. Learn how the DuPont system shows the interrelationship between financial ratios. Shows how to calculate and manipulate the DuPont Formula.
  6. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  7. Fundamental Analysis

    Decoding DuPont Analysis

    Get a deeper understanding of ROE with these three-step and five-step calculations.
  8. Stock Analysis

    Analyzing JetBlue's Return on Equity (JBLU)

    Learn about JetBlue's historical ROE and how it stacks up to similar-sized peers. ROE is a useful metric for investors to understand.
  9. Stock Analysis

    Analyzing Ford's Return on Equity (ROE)

    Understand how to interpret Ford's recent return on equity (ROE) ratios, what they tell you about Ford's performance and how it compares to its competition.
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. What level of return on equity is common for a company in the banking sector?

    Discover what the average return on equity (ROE) ratio is for companies in the banking industry, and understand the significance ... Read Answer >>
  2. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Answer >>
  3. What is the difference between a company's equity and its shareholders' equity?

    Understand the difference and the interrelationship between shareholders' equity in a company and the company's actual total ... Read Answer >>
  4. What is the average return on equity for a company in the financial services sector?

    Learn the importance of calculating a company's return on equity and what businesses in the financial services industry average ... Read Answer >>
  5. What is the difference between ROCE and ROE?

    Discover how investors and analysts utilize the return on equity and return on capital employed ratios to gauge financial ... Read Answer >>
  6. Are companies with a negative return on equity (ROE) always a bad investment?

    Any metric that uses net income is basically nullified as an input when a company reports negative profits. Return on equity ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center