Return on Equity (ROE) Calculator
This calculator determines the Return on Equity (ROE), a key financial metric that measures how effectively a company generates profits from shareholders' investments.
Formula: ROE = (Net Income / Shareholders' Equity) × 100
Enter Financial Data
Understanding Return on Equity (ROE)
What is Return on Equity?
Return on Equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It's expressed as a percentage and calculated as:
ROE = (Net Income / Shareholders' Equity) × 100
Key Components
- Net Income: The company's total profit after all expenses, taxes, and interest
- Shareholders' Equity: Total assets minus total liabilities (also called book value)
Interpreting ROE Values
- ROE < 10%: Below average performance
- 10-15%: Average performance
- 15-20%: Good performance
- > 20%: Excellent performance
ROE Calculation Examples
Example 1: Basic ROE Calculation
Scenario: Company A has $1,000,000 net income and $5,000,000 shareholders' equity.
Calculation: ROE = ($1,000,000 / $5,000,000) × 100 = 20%
Interpretation: Excellent performance - generates $0.20 for every $1 of equity.
Example 2: Comparing Two Companies
Scenario: Company B ($500k income, $2M equity) vs Company C ($750k income, $6M equity).
Company B: ROE = ($500,000 / $2,000,000) × 100 = 25%
Company C: ROE = ($750,000 / $6,000,000) × 100 = 12.5%
Conclusion: Company B is more efficient at generating profits from equity.
Example 3: Negative Net Income
Scenario: Startup company with -$200,000 net loss and $1,000,000 equity.
Calculation: ROE = (-$200,000 / $1,000,000) × 100 = -20%
Interpretation: Negative ROE indicates the company is losing money.
Example 4: High Growth Tech Company
Scenario: Tech startup with $2M net income and $3M equity.
Calculation: ROE = ($2,000,000 / $3,000,000) × 100 = 66.67%
Note: Extremely high ROE may indicate high leverage or reinvestment needs.
Example 5: Mature Utility Company
Scenario: Utility company with $500M net income and $10B equity.
Calculation: ROE = ($500,000,000 / $10,000,000,000) × 100 = 5%
Interpretation: Low ROE typical for capital-intensive, regulated industries.
Example 6: Bank with Leverage
Scenario: Bank with $10B net income and $50B equity.
Calculation: ROE = ($10,000,000,000 / $50,000,000,000) × 100 = 20%
Note: Banks typically have higher ROE due to financial leverage.
Example 7: Retail Chain Analysis
Scenario: Retailer with $1.2M net income and $8M equity.
Calculation: ROE = ($1,200,000 / $8,000,000) × 100 = 15%
Interpretation: Solid performance for retail sector.
Example 8: Seasonal Business
Scenario: Seasonal business with $300k annual net income and $1.5M average equity.
Calculation: ROE = ($300,000 / $1,500,000) × 100 = 20%
Note: Should compare to industry seasonal benchmarks.
Example 9: Company with Stock Buybacks
Scenario: Company reports $5M net income. Equity was $25M before $5M buyback.
Calculation: ROE = ($5,000,000 / $20,000,000) × 100 = 25%
Note: Buybacks reduce equity, artificially boosting ROE.
Example 10: Start-up vs Established Company
Scenario: Start-up ($50k income, $200k equity) vs Established ($2M income, $20M equity).
Start-up: ROE = 25%
Established: ROE = 10%
Analysis: Higher ROE doesn't always mean better - must consider growth stage.
Frequently Asked Questions about ROE
1. What is a good ROE percentage?
Generally, ROE between 15-20% is considered good, while above 20% is excellent. However, benchmarks vary by industry. Capital-intensive industries often have lower ROE.
2. Can ROE be negative?
Yes, negative ROE occurs when net income is negative (the company is losing money). This means shareholders' equity is being eroded.
3. How is ROE different from ROI?
ROE measures return specifically on shareholders' equity, while ROI (Return on Investment) can measure return on any type of investment or capital.
4. Why is ROE important to investors?
ROE helps investors assess how effectively management is using shareholders' capital to generate profits. Higher ROE generally indicates more efficient use of equity.
5. What are limitations of ROE?
ROE can be artificially inflated by high debt levels (financial leverage) or share buybacks. It doesn't account for risk or asset quality.
6. How often should ROE be calculated?
ROE is typically calculated quarterly and annually. Annual ROE is most meaningful as it smooths out seasonal variations.
7. What's the DuPont analysis of ROE?
The DuPont formula breaks ROE into three components: Profit Margin × Asset Turnover × Equity Multiplier. This provides deeper insight into what's driving ROE.
8. How does debt affect ROE?
Debt can increase ROE (through financial leverage) because it reduces equity while (hopefully) maintaining profits. However, too much debt increases risk.
9. Should ROE be compared across industries?
ROE comparisons are most meaningful within the same industry. Different industries have different capital structures and typical ROE ranges.
10. How can a company improve its ROE?
Companies can improve ROE by: increasing profits, reducing equity through buybacks/dividends, improving operational efficiency, or using assets more productively.
