Rate of Return on Common Stockholders Equity Calculator

Rate of Return on Common Stockholders' Equity Calculator

Results:

Earnings Available to Common Stockholders:

Average Common Stockholders' Equity:

Rate of Return on Common Equity:

function calculateROE() { var netIncome = parseFloat(document.getElementById('netIncome').value); var prefDiv = parseFloat(document.getElementById('preferredDividends').value) || 0; var beginEq = parseFloat(document.getElementById('beginEquity').value); var endEq = parseFloat(document.getElementById('endEquity').value); if (isNaN(netIncome) || isNaN(beginEq) || isNaN(endEq)) { alert("Please enter valid numbers for Net Income and Equity values."); return; } var commonEarnings = netIncome – prefDiv; var averageEquity = (beginEq + endEq) / 2; if (averageEquity === 0) { alert("Average Equity cannot be zero."); return; } var roeValue = (commonEarnings / averageEquity) * 100; document.getElementById('commonEarningsResult').innerText = "$" + commonEarnings.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('avgEquityResult').innerText = "$" + averageEquity.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('roePercentage').innerText = roeValue.toFixed(2) + "%"; document.getElementById('resultDisplay').style.display = 'block'; }

Understanding Rate of Return on Common Stockholders' Equity

The Rate of Return on Common Stockholders' Equity (ROE) is a critical financial metric used by investors and analysts to evaluate how effectively a company is using the money invested by its common shareholders to generate profit. Unlike the standard Return on Equity calculation, this specific variation isolates the earnings and equity specifically belonging to common shareholders by removing the impact of preferred stock.

The ROE Formula

ROE on Common Equity = (Net Income – Preferred Dividends) / Average Common Stockholders' Equity

Where:

• Net Income: The total profit of the company after all expenses, taxes, and interest.
• Preferred Dividends: The dividends that must be paid to preferred stockholders before common stockholders receive anything.
• Average Common Stockholders' Equity: The average of the beginning and ending common equity for the period (usually a fiscal year or quarter).

Practical Example

Imagine a company, TechGlobal Corp, with the following financial data for the year:

• Net Income: $850,000
• Preferred Dividends: $50,000
• Beginning Common Equity: $4,000,000
• Ending Common Equity: $4,400,000

Step 1: Calculate earnings available to common shareholders.
$850,000 – $50,000 = $800,000.

Step 2: Calculate average common equity.
($4,000,000 + $4,400,000) / 2 = $4,200,000.

Step 3: Calculate the Rate of Return.
($800,000 / $4,200,000) * 100 = 19.05%.

This means for every dollar of common equity, the company generated roughly 19 cents in profit for its common shareholders.

Why This Metric Matters

Investors use the Rate of Return on Common Stockholders' Equity for several reasons:

1. Efficiency Comparison: It allows investors to compare companies within the same industry to see which management team is better at turning shareholder capital into profit.
2. Growth Potential: A high ROE often suggests a company can fund its own growth without needing excessive debt or issuing more shares.
3. Sustainability: Consistently high ROE indicates a strong "economic moat" or competitive advantage.

What is a "Good" Return?

While "good" varies by industry, a return of 15% to 20% is generally considered excellent for most sectors. However, it is vital to check the company's debt levels. A very high ROE can sometimes be the result of excessive financial leverage (debt), which increases the risk for the common shareholder.