Return on Equity (ROE) Calculator
Evaluate your company's profitability relative to shareholders' equity.
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ROE Formula
Return on Equity (ROE) is a financial metric that measures a company's profitability relative to shareholders' equity. It shows how effectively a company is using its equity to generate profits.
How to Calculate ROE
To calculate ROE, follow these steps:
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1Determine the net income from your income statement
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2Find the shareholders' equity from your balance sheet
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3Divide net income by shareholders' equity
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4Multiply by 100 to get the percentage
Interpreting ROE
ROE is a key metric for evaluating a company's financial performance and efficiency. Here's how to interpret different ROE values:
- ROE > 15%: Excellent performance, indicating strong profitability and efficient use of equity.
- ROE 10-15%: Good performance, showing solid profitability and effective use of equity.
- ROE 5-10%: Average performance, suggesting room for improvement in profitability or equity efficiency.
- ROE < 5%: Below average performance, indicating potential issues with profitability or equity utilization.
- Negative ROE: Poor performance, suggesting the company is not generating returns for shareholders.
ROE - Practical Examples
Example 1 High-Performing Company
A company with a net income of $1,000,000 and shareholders' equity of $5,000,000.
ROE = ($1,000,000 / $5,000,000) × 100% = 20%
Example 2 Average-Performing Company
A company with a net income of $500,000 and shareholders' equity of $10,000,000.
ROE = ($500,000 / $10,000,000) × 100% = 5%
Example 3 Struggling Company
A company with a net loss of $200,000 and shareholders' equity of $8,000,000.
ROE = (-$200,000 / $8,000,000) × 100% = -2.5%