The return on equity formula
Return on equity (ROE) measures how much profit a company generates for every dollar of shareholders' equity: ROE% = net income ÷ shareholder equity × 100. Shareholder equity is the company's assets minus its liabilities — the owners' stake. A higher ROE means management is using invested capital efficiently to produce profit. Investors use ROE to compare how well companies in the same industry convert equity into earnings. ROE is a narrower cousin of the general ROI calculator, measured against shareholder equity.
How to use this calculator
Enter the company's net income (annual profit after taxes) and its shareholder equity from the balance sheet. The tool returns the ROE percentage. Compare ROE within an industry rather than across very different sectors, since capital structures vary. For a margin-based view of profitability instead, see the net profit margin calculator.
Worked example
With $20,000 of net income and $100,000 of equity: ROE = 20,000 ÷ 100,000 × 100 = 20%. The same profit on a smaller equity base produces a higher ROE:
| Net income | Equity | ROE |
|---|---|---|
| $20,000 | $200,000 | 10% |
| $20,000 | $100,000 | 20% |
| $20,000 | $50,000 | 40% |
These figures are an estimate for general information only and are not financial advice; consult a qualified professional before making money decisions. To annualize several years of returns, use the CAGR calculator.
Frequently asked questions
- How do I calculate return on equity?
- Divide net income by shareholder equity and multiply by 100. For $20,000 of net income on $100,000 of equity, the ROE is 20%.
- What is the ROE on $20,000 income and $100,000 equity?
- It is 20%: 20,000 ÷ 100,000 × 100. The company earns 20 cents of profit for every dollar of equity.
- What is a good ROE?
- It varies by industry, but many investors view a sustained ROE of 15–20% as strong. Always compare against peers in the same sector.
- Can a high ROE be misleading?
- Yes. A very high ROE can result from heavy debt that shrinks equity rather than from strong profits, so check the company's leverage too.
- Which equity figure should I use?
- Use shareholder equity from the balance sheet at the end of the period, or the average of opening and closing equity for a smoother reading. Average equity is the better choice when the company raised or returned capital part-way through the year.