Return on Equity (ROE) Calculator
Calculate how efficiently a company uses its equity to generate profits with our free ROE calculator.
Calculate Return on Equity
ROE Results
Return on Equity
10.00%
Net Income ÷ Shareholder's Equity
ROE Interpretation
Good ROE
A 10% ROE is considered good in many industries. This indicates the company is generating $0.10 of profit for every $1 of shareholder equity.
Industry Benchmarks
ROE Visualization
Understanding Return on Equity
Return on Equity (ROE) is a key financial metric that measures how effectively a company uses its equity capital to generate profits. It shows the amount of net income returned as a percentage of shareholders' equity.
The ROE Formula
The formula for calculating Return on Equity is:
ROE = (Net Income ÷ Shareholder's Equity) × 100%
Where:
- Net Income: The company's total earnings or profit after taxes and all expenses.
- Shareholder's Equity: The amount of assets remaining after deducting liabilities (also known as book value).
Interpreting ROE Values
ROE values can vary significantly across industries, but generally:
- ROE > 15%: Considered excellent in many industries
- ROE 10-15%: Good performance
- ROE 5-10%: Average performance
- ROE < 5%: Below average, may indicate inefficient use of equity
However, it's important to compare ROE against industry benchmarks, as capital-intensive industries typically have lower ROEs than less capital-intensive ones.
Factors Affecting ROE
Several factors can influence a company's Return on Equity:
- Profit Margins: Higher profit margins lead to higher ROE.
- Asset Turnover: More efficient use of assets increases ROE.
- Financial Leverage: Increased debt can boost ROE but also increases financial risk.
- Tax Efficiency: Lower effective tax rates can improve ROE.
- Dividend Policy: Retaining earnings instead of paying dividends can increase equity and potentially affect ROE.
Limitations of ROE
While ROE is a valuable metric, it has some limitations:
- Debt Levels: Companies with high debt can have artificially high ROE.
- Accounting Practices: Different accounting methods can affect reported ROE.
- Short-term Focus: High ROE achieved by cutting long-term investments may harm future growth.
- Industry Differences: ROE should be compared within industries, not across different sectors.
For a comprehensive financial analysis, ROE should be used alongside other metrics like Return on Assets (ROA), Return on Invested Capital (ROIC), and industry-specific benchmarks.
Frequently Asked Questions
What is a good Return on Equity?
A good ROE varies by industry, but generally, an ROE of 15-20% is considered excellent, 10-15% is good, 5-10% is average, and below 5% may indicate inefficient use of equity. Always compare against industry benchmarks for proper context.
How can a company improve its ROE?
Companies can improve ROE by increasing profit margins (through higher prices or cost reduction), improving asset turnover (using assets more efficiently), increasing financial leverage (taking on more debt), or through share buybacks (reducing outstanding equity).
Why might a high ROE be misleading?
A high ROE can sometimes be misleading if it's achieved through excessive debt (financial leverage), one-time accounting gains, or by reducing equity through share buybacks. These methods may boost ROE without improving operational efficiency.
How often should ROE be calculated?
ROE is typically calculated annually using year-end financial statements. However, for more timely analysis, it can be calculated quarterly or using trailing twelve-month (TTM) data to identify trends and changes in performance.
How does ROE differ from Return on Assets (ROA)?
While ROE measures profitability relative to shareholder equity, Return on Assets (ROA) measures profitability relative to total assets. ROA provides insight into how efficiently a company uses all its assets, regardless of how they're financed, while ROE focuses specifically on returns generated for shareholders.