Return on Equity (ROE) Calculator
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What is Return on Equity (ROE)?
Return on Equity (ROE) is a critical financial metric that measures a corporation's profitability in relation to stockholders' equity. It effectively demonstrates how efficiently a company's management is using the money invested by its shareholders to generate earnings growth.
ROE = (Net Income / Shareholder's Equity) x 100
How to Calculate ROE: Step-by-Step
To calculate ROE, you need two primary figures usually found on a company's financial statements:
- Net Income: This is the bottom-line profit found on the Income Statement after all expenses, taxes, and interest have been paid.
- Shareholder's Equity: Found on the Balance Sheet, this is the residual interest in the assets of the entity after deducting all its liabilities.
Real-World ROE Example
Imagine "TechFlow Solutions" reports the following for the fiscal year:
| Metric | Value |
|---|---|
| Net Income | $150,000 |
| Shareholder's Equity | $1,000,000 |
| ROE Calculation | ($150,000 / $1,000,000) * 100 = 15% |
This means for every dollar of equity capital TechFlow holds, it generates 15 cents of profit.
What is a Good ROE?
While a "good" ROE depends heavily on the industry, a general rule of thumb is that an ROE of 15-20% is considered excellent. However, it is vital to compare a company's ROE against its historical performance and its direct industry peers. A very high ROE can sometimes indicate that a company is carrying too much debt relative to its equity (high leverage).