1. What is Return On Equity (ROE)?

Return On Equity (ROE) is a financial ratio that measures a company's profitability relative to shareholders' equity. It shows how effectively management is using shareholders' investments to generate profits.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

• \( Income \) — Net income (currency)
• \( Beginning\ Equity \) — Shareholders' equity at start of period (currency)
• \( Ending\ Equity \) — Shareholders' equity at end of period (currency)

Explanation: The equation uses average equity to account for changes in equity during the period being measured.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors to assess how efficiently a company is generating profits from shareholders' investments. Higher ROE generally indicates more efficient management.

4. Using the Calculator

Tips: Enter net income and both equity values in the same currency. All values must be non-negative. Beginning and ending equity should typically be from consecutive balance sheets.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: ROE varies by industry, but generally 15-20% or higher is considered good. Compare to industry averages and historical company performance.

Q2: Why use average equity?
A: Using average equity accounts for changes during the period (like retained earnings or share issuances) and matches the income statement time period better.

Q3: How does ROE differ from ROI?
A: ROE specifically measures return on shareholders' equity, while ROI (Return on Investment) can refer to returns on any type of investment.

Q4: Can ROE be too high?
A: Exceptionally high ROE may indicate excessive leverage (debt) or accounting irregularities. Sustainable ROE is more valuable than temporarily high ROE.

Q5: What affects ROE?
A: Profit margins, asset turnover, financial leverage, share buybacks, and dividend policies all influence ROE.