Return on Equity Calculator Formula
Understand the math behind the return on equity calculator. Each variable explained with a worked example.
Formulas Used
Return on Equity (ROE)
roe = (equity_start + equity_end) > 0 ? (net_income / ((equity_start + equity_end) / 2)) * 100 : 0Average Shareholder Equity
avg_equity = (equity_start + equity_end) / 2Variables
| Variable | Description | Default |
|---|---|---|
net_income | Net Income(USD) | 200000 |
equity_start | Shareholder Equity (Beginning)(USD) | 700000 |
equity_end | Shareholder 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
- 01Average Equity = ($700,000 + $900,000) / 2 = $800,000
- 02ROE = ($200,000 / $800,000) x 100 = 25%
- 03Shareholders earned 25 cents for every dollar of equity invested.
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