Use this ROE Calculator to derive the return on equity (ROE) based on the net income and the total equity value of a company or project.
Return on Equity Calculator
Calculation Results
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ROE Formula
The formula for ROE used in our return on equity calculator is simple:
ROE = Net Income / Total Equity
Net Income, usually called “Net Profit,” is determined with variable values in a currency that matters to you. You get a ratio. The percentage of the ratio is found by multiplying it by 100. It is critical to realize that if a business has significant debt, then its equity may be harmful, and this can make return on equity (ROE) negative.
How to calculate return on equity?
ROCE (Return on Equity) is a standard financial ratio that measures how efficiently a company is using its funds. Here, equity will represent the net assets of the company or total assets minus its liabilities. ROE is the proportion of a company’s equity that is earned from the profit it generates. ROE can be calculated by dividing net income by shareholder equity. Obviously, this is different from the one to calculate Return on Capital Employed (ROCE), which considers liabilities.
Inserting the appropriate values for your practice is simple. Suppose a company’s net income for the last fiscal year is $100K, and it earned this number by spending net assets of $1,000,000; its return on equity (ROE) would be 1/10 or 10%. You can check this answer with the help of our ROE calculator. This translates to the biz creating $1 of value added for every $10 of net capital assets. Net equity can vary from quarter to quarter, too, so you could take the arithmetic average.
ROE (return on equity) also tells us a company’s expected growth by multiplying it with the retention ratio (the percentage of net income that will be reinvested to support business growth in the future, also referred to as the plow-back ratio). These types of analyses are often called “sustainable growth model” based analyses.
When ROI is all that the company has in which you stand aside as the one and only investor (no debt or other party’s capital), the ratio is between your return on equity (ROE). Just remember that in this case, you can use either the return on equity calculator or the ROI calculator and get the same result.
What is a Good Return on Equity?
ROE (Return on Equity) for lower-risk, mature businesses is usually at or near 1215% annualized. However, for really aggressive and very high-risk investments, a 20%, 30%, or even higher return of return is seen as a sufficient reward for this level of risk. Good is not an objective standard, but it really depends on the industry, competition, perceived risk, and time preference of capital, among other considerations in this context.
ROE is, therefore, only a good metric to compare companies when they are at least somewhat comparable (e.g., in the same industry, geographic location, and legal/regulatory environment). This is especially true if the conditions vary vastly. One must take into account at least THE OTHER metrics apart from calculating ROE.
One standard “shortcut” is to compare a company against its Long-Term average ROE of the S&P 500 (around 14%) one by one. Otherwise, an ROE of less than 10% is generally evil.