Return on Equity Calculator Formula

Understand the math behind the return on equity calculator. Each variable explained with a worked example.

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Formulas Used

Return on Equity (ROE)

roe = (equity_start + equity_end) > 0 ? (net_income / ((equity_start + equity_end) / 2)) * 100 : 0

Average Shareholder Equity

avg_equity = (equity_start + equity_end) / 2

Variables

VariableDescriptionDefault
net_incomeNet Income(USD)200000
equity_startShareholder Equity (Beginning)(USD)700000
equity_endShareholder Equity (End)(USD)900000

How It Works

How to Calculate Return on Equity

Formula

ROE = (Net Income / Average Shareholder Equity) x 100

ROE quantifies how well a company turns owner capital into profit. Investors use it to compare management effectiveness across firms. Because ROE only considers the equity portion, companies that use more debt can show higher ROE even with moderate overall profitability. That is why it is best evaluated alongside ROA and the debt-to-equity ratio.

Worked Example

A company reported $200,000 net income. Shareholder equity was $700,000 at the start and $900,000 at the end.

net_income = 200000equity_start = 700000equity_end = 900000
  1. 01Average Equity = ($700,000 + $900,000) / 2 = $800,000
  2. 02ROE = ($200,000 / $800,000) x 100 = 25%
  3. 03Shareholders earned 25 cents for every dollar of equity invested.

Frequently Asked Questions

What is a good ROE?

An ROE of 15-20% is generally considered strong. The S&P 500 average is around 15%. Very high ROE (above 30%) can be great but may also result from excessive leverage, so always check the debt level.

Can high leverage inflate ROE?

Yes. By funding more operations with debt rather than equity, a company shrinks its equity base. Dividing the same net income by smaller equity produces a higher ROE, even though total risk has increased.

Learn More

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