Return on Equity (ROE) Calculator
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Please enter a valid net income.
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Total Assets must be greater than Liabilities to calculate positive equity.
Shareholders' Equity:
$0.00
Rate of Equity (ROE):
0.00%
*Calculated as Net Income / (Assets – Liabilities)
How to Calculate Rate of Equity
The "Rate of Equity," commonly referred to in finance as Return on Equity (ROE), is a critical metric used to measure a corporation's profitability in relation to the stockholders' equity. It reveals how effectively a company's management is using shareholders' capital to generate profits.
The ROE Formula
To calculate the rate of equity, you need two primary figures: Net Income and Shareholders' Equity. Since Shareholders' Equity is often derived from the balance sheet equation, the expanded calculation is:
ROE = (Net Income / Shareholders' Equity) × 100
Where:
Shareholders' Equity = Total Assets – Total Liabilities
Where:
Shareholders' Equity = Total Assets – Total Liabilities
Understanding the Components
- Net Income: The total profit of the company after all expenses, taxes, and interest have been deducted. This is usually found at the bottom of the income statement.
- Total Assets: Everything the company owns that has value (cash, inventory, property, equipment).
- Total Liabilities: Everything the company owes (loans, accounts payable, mortgages).
- Shareholders' Equity: The residual interest in the assets of the entity after deducting liabilities. It represents the net value belonging to the owners.
Example Calculation
Let's assume you are analyzing a small manufacturing business with the following financial data:
- Net Income: $150,000
- Total Assets: $1,000,000
- Total Liabilities: $400,000
First, calculate the Equity:
$1,000,000 (Assets) – $400,000 (Liabilities) = $600,000 (Equity)
Next, calculate the ROE:
($150,000 / $600,000) × 100 = 25%
A 25% ROE indicates that for every dollar of equity invested by shareholders, the company generated 25 cents in profit.
Why is Rate of Equity Important?
Calculating the rate of equity helps investors compare the profitability of companies within the same industry. A higher ROE generally suggests that a company is more efficient at generating profit from its equity financing. However, extremely high ROE can sometimes indicate excessive debt (high leverage), as a smaller equity denominator inflates the percentage.