How this calculator works
Compare earnings available to common shareholders with their average book equity. Subtract preferred dividends from net income before entering common earnings and exclude preferred equity from the denominator. The positive equity requirement avoids misleading ratios when accumulated losses have made book equity negative.
Formula
ROE = common net income / average common equity. Common income = ROE × equity. Equity = common income / ROE.
Worked example
$150,000 common earnings and $1,000,000 equity produce 15% ROE. A $30,000 loss on $600,000 equity produces -5%.
Advertisement
Frequently asked questions
Is a higher ROE always better?
Borrowing and share repurchases can raise ROE by reducing common equity. Compare leverage and operating margins as well.
Why use average equity?
It better matches period earnings to the capital employed throughout that period.
Does ROE equal a shareholder return?
No. It uses accounting earnings and book equity, rather than dividends and market price changes.