1. What is Return On Equity (ROE)?

Return On Equity (ROE) is a financial ratio that measures a company's profitability by showing how much profit a company generates with the money shareholders have invested. It's expressed as a percentage and is a key indicator of financial performance.

2. How Does the Calculator Work?

The calculator uses the ROE formula:

Where:

• Net Income — Company's total earnings or profit
• Average Equity — Average of beginning and ending shareholder equity for the period

Explanation: The ratio shows how effectively management is using a company's assets to create profits.

3. Importance of ROE Calculation

Details: ROE helps investors compare the profitability of companies in the same industry. A higher ROE indicates more efficient use of equity capital. It's particularly important for evaluating financial institutions and other capital-intensive businesses.

4. Using the Calculator

Tips: Enter net income and average equity in dollars. Both values must be positive numbers (average equity cannot be zero).

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE percentage?
A: Generally, an ROE between 15-20% is considered good, but this varies by industry. Compare with industry averages for meaningful analysis.

Q2: Can ROE be too high?
A: Yes, extremely high ROE may indicate excessive leverage (debt) or inconsistent profits. Investigate the reasons behind unusually high ROE.

Q3: How is average equity calculated?
A: Average equity = (Beginning Equity + Ending Equity) / 2. Use shareholder equity figures from the balance sheet.

Q4: What's the difference between ROE and ROI?
A: ROE measures return specifically on shareholders' equity, while ROI (Return on Investment) measures return on any type of investment.

Q5: Why use average equity instead of ending equity?
A: Using average equity accounts for changes during the period (from new investments, retained earnings, etc.), providing a more accurate measure.