How this number is made
Return on equity is profit divided by the owners’ stake. Leverage raises it, because the same profit sits on a smaller equity, until the debt is the story. Use average equity for the period if you have it. This page uses the equity you type.
- Net income should be after interest and tax.
- Equity is assets minus liabilities, or the book equity you are willing to stand on.
Formula
ROE = net income ÷ equity.
Worked example
With the figures already in the form, return on equity is 20.0%.
Questions
Why did ROE jump after we borrowed?
The denominator shrank relative to the profit, or the profit did not fall as much as the equity. That is leverage, not automatically a better business.
What if equity is negative?
The ratio is not meaningful. The page will say so.