Return on Equity Calculator

More about the Return on Equity so you can better use the results provided by this corporate finance calculator.

The Return on Equity \((ROE)\) is the ratio of net income to total equity. This ratio is a profitability measure, and it indicates how many dollars in net income a firm has for each $1 in total equity.

How do you compute the Return on Equity (ROE)?

In order to calculate the ROE, we use the following formula:

\[ \text{ROE} = \displaystyle \frac{\text{Net Income}}{\text{Total Equity}}\]

The return on equity is one crucial measure of profitability used by many investors to analyze the performance of investment portfolios. It has a particular interest due to its relationship to Dupont's identity.

Example of ROE Calculation

Question: Assume that your company has a net income of $45,000, and the total equity possessed by shareholders is $500,000. Compute the return on equity for the firm.

Solution:

This is the information we have been provided with:

Net Income =	\(45000\)
Total Equity =	\(500000\)

The return on equity \((ROE)\) is computed using the following formula:

\[ \begin{array}{ccl} ROE & = & \displaystyle \frac{\text{Net Income}}{\text{Total Equity}} \\\\ \\\\ & = & \displaystyle \frac{\text{\textdollar}45000}{\text{\textdollar}500000} \\\\ \\\\ & = & 0.09 \end{array} \]

Therefore, the return on equity for the given net income of \(\text{\textdollar}45000\) and total assets of \(\text{\textdollar}500000\) is \(ROE = 0.09 = 9\%\). This means the company generates \(\text{\textdollar}0.09\) in net income for every $1 in total equity.

Finance calculators for other profitability ratios

You can also consider other measures of profitability, such as the return on assets or profit margin .

One interesting approach to the calculation of the Return on Equity is the use of DuPont Identity , which breaks down the ROE calculation into three crucial factors.