How to Calculate Return on Equity
What is Return on Equity?
Return on Equity (ROE) measures how efficiently a company generates profit from shareholders' equity. It shows how much net income is produced for every pound or dollar of equity invested. ROE = Net income / Shareholders' equity.
Step-by-Step Guide
- 1Find net income from the income statement
- 2Find average shareholders' equity: (start + end equity) / 2
- 3ROE (%) = (Net income / Average equity) × 100
- 4Decompose using DuPont analysis: ROE = Profit margin × Asset turnover × Equity multiplier
Worked Examples
Input
Net income $50k · Average equity $250k
Result
ROE = 20%
Returns $0.20 for every $1 of equity
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