Return on Equity (ROE) Calculator
Measure your company's profitability against its equity
How to Calculate 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 communicates how efficiently a company's management is using its investors' capital to generate earnings.
The ROE Formula
Understanding the Components
- Net Income: This is the "bottom line" profit of the company after all expenses, taxes, and interest have been paid. For the most accurate ROE calculation, use the net income from the most recent fiscal year.
- Shareholders' Equity: This represents the amount of money that would be returned to shareholders if all assets were liquidated and all company debt was paid off. It is calculated as Total Assets minus Total Liabilities.
Example Calculation
If a tech firm generates $150,000 in net income and has total shareholder equity of $1,000,000, the calculation would be:
ROE = ($150,000 / $1,000,000) × 100 = 15%
This means for every dollar of equity, the company generated 15 cents in profit.
What is a Good ROE?
A "good" ROE depends heavily on the industry average. Generally, a rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital. Many investors target companies with an ROE that is consistently above 15% to 20% compared to industry peers.