What is 'Return On Average Equity  ROAE'
Return on average equity (ROAE) is an adjusted version of the return on equity (ROE) measure of company profitability, in which the denominator, shareholders' equity, is changed to average shareholders' equity. Typically, ROAE refers to a company's performance over a fiscal year, so the ROAE numerator is net income and the denominator is computed as the sum of the equity value at the beginning and end of the year, divided by 2.
BREAKING DOWN 'Return On Average Equity  ROAE'
One of the most important determinants of performance is return. ROAE is the same as ROE, except instead of dividing net income by stockholders' equity, the analyst divides net income by an average of stockholders' equity. ROAE can give a more accurate depiction of a company's corporate profitability, especially if the value of the shareholders' equity has changed considerably during a fiscal year.In situations where the shareholders' equity does not change or changes by very little during a fiscal year, the ROE and ROAE numbers should be identical, or at least similar.
ROAE Calculation
ROAE is calculated by dividing net income by average equity. Net income is found on the income statement in the annual report. Stockholders' equity is found at the bottom of the balance sheet in the annual report. The income statement captures transactions from the entire year, whereas the balance sheet is a snapshot in time. As a result, analysts divide net income by an average of the beginning and end of the time period for balance sheet line items.
ROAE Interpretation
A high ROAE means a company is creating more income for each dollar of stockholders' equity. It also tells the analyst about which levers the company is pulling to achieve higher returns: profitability, asset turnover or leverage. The product of these three measures equals ROAE. The profit margin provides information about operating efficiency and is calculated by dividing net income by sales. The average asset turnover is a measure of asset efficiency and is calculated by dividing sales by the average total assets. The financial leverage, measured as the average assets divided by the average stockholders' equity, is a measure of the firm's debt level.
The ratio is driven by profitability, operating efficiency and debt. Leverage increases ROAE without increasing net income. As a result, it is important for analysts to confirm high ROAE measures with other return ratios to ensure a growing ROAE isn't due to growing debt instead of growing sales and improved productivity.

Return On Equity  ROE
The amount of net income returned as a percentage of shareholders ... 
Return
The gain or loss of a security in a particular period. The return ... 
Average Return
The simple mathematical average of a series of returns generated ... 
Shareholder Equity Ratio
A ratio used to help determine how much shareholders would receive ... 
Stockholders' Equity
The portion of the balance sheet that represents the capital ... 
Equity Multiplier
The ratio of a companyâ€™s total assets to its stockholderâ€™s equity. ...

Investing
What Are The Main Differences Between Return On Equity (ROE) and Return On Assets?
Return on equity and return on assets are important measures for evaluating how well a company manages the capital its shareholders entrust to it. 
Investing
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. 
Investing
What Is Stockholders' Equity?
Stockholdersâ€™ equity represents the equity that shareholders own in a company. 
Investing
ROA And ROE Give Clear Picture Of Corporate Health
Both measure performance, but sometimes they tell a very different story. This is why theyâ€™re best used together. 
Markets
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. 
Investing
ROA and ROE Give Clear Picture Of Corporate Health
ROE indicates if a companyâ€™s value is growing at an acceptable rate. ROA reveals how much profit a company earns for every dollar of assets. 
Markets
Equity Multiplier
The equity multiplier is a straightforward ratio used to measure a companyâ€™s financial leverage. The ratio is calculated by dividing total assets by total equity. 
Investing
Earnings Power Drives Stocks
Internal return on investment helps determine a stock's ability to propel shareholder returns. 
Investing
6 Basic Financial Ratios And What They Reveal
Here's a brief introduction to six financial ratios every investor should be familiar with. 
Investing
What is the Shareholder Equity Ratio?
The shareholder equity ratio shows how much money shareholders will receive if a company has to liquidate its assets.

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 >> 
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 >> 
Should I expect growth or income from buying stock in the consumer packaged goods ...
Find out how annual returns are expressed in financial statements. How do fundamental investors measure annual returns? What ... Read Answer >> 
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 >> 
How do you calculate shareholder equity?
Find out more about shareholders' equity, what shareholders' equity measures and how to calculate a company's shareholders' ... Read Answer >> 
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 >>