How do you calculate return On equity (roe) share capital ratio?
ROE - Stands for Return On Equity. It is defined as the ratio of net income to the average shareholders equity. ROE can also be determined when knowing a firm's dividend growth rate (g) and earnings retention rate (b). Return on equity is measured to determine how much profit a company generates with the money shareholders have invested. Let us learn here how to calculate Return on Equity (ROE) in simple steps using a simple formula.
Formula For ROE Calculation
Return On Equity (ROE) = Net Income / Average Shareholders Equity x 100
Here the net income is for the full fiscal year. Shareholders equity does not include preferred shares.
Example: Assume that the net income of a corporation is $1,722,000 and the average shareholders equity was $15,459,500. Calculate its return on equity.
Step 1: Given,
Net income = $1,722,000
Average shareholders equity = $15,459,500
Step 2:Applying the values in the formula,
ROE = (Net income / Average Shareholders Equity) x 100
ROE = (1722000 / 15459500) x 100
ROE = 0.11 x 100
ROE = 11%