The return on equity, or ROE, is used in fundamental analysis to measure a company's profitability. ROE determines the amount of net income a company generates with its shareholders' equity. ROE may be used to compare the profitability of one company to another firm in the same industry.
Calculating ROE in Excel
The formula to calculate a company's ROE is its net income divided by shareholders' equity. Here's how to use Microsoft Excel to set up the calculation for ROE:
- In Excel, get started by right-clicking on columns A, B and C. Next, left click on column width and change the value to 30 for each of the columns. Then, click OK.
- Next, enter the name of a company in cell B1 and the name of another company into cell C1.
- Then, enter "Net Income" into cell A2, "Shareholders' Equity" into cell A3 and "Return on Equity" into cell A4. Once that is completed, enter the corresponding values for these descriptions in cells B2, B3, C2 and C3.
For example, Facebook (FB) has a net income of $15.920 billion and shareholders' equity of $74.347 billion as of Dec. 31, 2017, while its competitor, Twitter (TWTR), has net income of -$108.063 million and shareholders' equity of $5.047 billion.
Let's set up the calculation for this example:
- Enter =15920000000 into cell B2 and =74347000000 into cell B3.
- Next, enter the formula =B2/B3 into cell B4. The resulting return on equity of Facebook is 21.41%.
- Then, enter =-108063000 into cell C2 and =5047218000 into cell C3.
- Next, enter the formula =C2/C3 into cell C4.
The resulting ROE of Twitter is -2.14%. Twitter is thus less profitable and operating at a loss, while Facebook is highly profitable.