Return on Equity
Online Calculators for Business & Investment
Return on Equity
The Return on Equity is rather similar to the return on assets. However, the Return on Equity specifically focuses on the return of one group of the business’ financers, the stockholders; the owners of the business.
The numerator of the ratio is net profit minus preference dividends and the denominator is average common stockholder equity. The ratio is given as a percentage and represents the return that the business achieved using the funds that the owners have put into the business as well as the retained earnings of the business (which are essentially stockholder funds also).
As with the return on assets, the Return on Equity is a direct measure of performance over time and between businesses.
There is also a key relationship between the Return on Equity and the return on assets. If the Return on Equity is higher than the return on assets then this means that the business is generating higher returns for its shareholders than it is paying in interest. In effect, it is successfully leveraging borrowed funds.
A Return on Equity figure of 18% means for every dollar of stockholder funds, the business is returning 18%, or 18 cents, of profit for the owners.
Return on Equity Calculator
The calculator asks for:
Net Income, which is found on the income statement.
Preference Dividends, which are generally found on the income statement.
Common Stockholder Equity at the Start of Period, which is found on the previous balance sheet.
Common Stockholder Equity at the End of Period, which is found on the current balance sheet.