What this calculator does
Return on equity measures how much profit a business generates for every dollar of shareholders’ equity invested in it. The return on equity formula divides net income by shareholders’ equity and expresses the result as a percentage, making it one of the standard ratios used to judge how efficiently a company turns owner capital into profit.
ROE is a distinct measure from margin or return on ad spend: it compares profit against the equity owners have put into the business, not against revenue or advertising cost. A business can carry a healthy profit margin and still show a modest ROE if it is financed mostly with a large equity base relative to its earnings, or a striking ROE on a thin equity base carrying significant debt.
The formula
Divide net income by shareholders’ equity, then multiply by 100 to express the result as a percentage. Net income should be for the same period the equity figure is measured over, or an average of opening and closing equity if the balance moved significantly during the period.
| Term | Meaning |
|---|---|
| ROE | Return on equity: net income ÷ shareholders’ equity × 100. |
| Net income | Profit after all expenses, interest and tax for the period being measured. |
| Shareholders’ equity | The owners’ stake in the business: total assets minus total liabilities. |
The inputs explained
| Field | What to enter |
|---|---|
| Net income ($) | Net income (profit after tax) for the period being measured. |
| Shareholders’ equity ($) | Total shareholders’ equity for the same period, from the balance sheet. |
When to use it
Comparing profitability across companies of different sizes
ROE is a ratio, so it allows a fair comparison between a large company and a much smaller one, unlike comparing raw profit figures directly.
Checking how efficiently retained profit is being used
A business that reinvests profit rather than distributing it grows its equity base over time; tracking ROE alongside that growth shows whether the extra equity is still earning a healthy return.
Reading ROE alongside debt levels
A high ROE achieved mainly through heavy borrowing, rather than genuine operating profitability, carries more risk than the same ROE achieved with little debt, which is why ROE is usually read alongside a company’s leverage.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How ROE changes with net income at a fixed equity base
A fixed $800,000 equity base, against a range of net income outcomes.
| Net income | Return on equity | Net income per $100 of equity |
|---|---|---|
| $40,000 | 5.00% | $5.00 |
| $80,000 | 10.0% | $10.00 |
| $120,000 | 15.0% | $15.00 |
| $160,000 | 20.0% | $20.00 |
| $200,000 | 25.0% | $25.00 |
| $240,000 | 30.0% | $30.00 |
How ROE changes with the equity base at a fixed net income
A fixed $120,000 net income, spread across a range of equity bases.
| Shareholders’ equity | Return on equity | Net income per $100 of equity |
|---|---|---|
| $400,000 | 30.0% | $30.00 |
| $600,000 | 20.0% | $20.00 |
| $800,000 | 15.0% | $15.00 |
| $1,000,000 | 12.0% | $12.00 |
| $1,500,000 | 8.00% | $8.00 |
| $2,000,000 | 6.00% | $6.00 |
Questions
How to calculate return on equity?
Divide net income by shareholders’ equity for the same period, then multiply by 100 to express it as a percentage: ROE = net income ÷ shareholders’ equity × 100.
What counts as a good return on equity?
It varies substantially by industry, since capital-intensive businesses typically carry larger equity bases than asset-light ones. Comparing ROE against similar companies in the same industry, or against the same company’s own history, is more useful than a single universal benchmark.
How is return on equity different from profit margin?
Margin compares profit against revenue; ROE compares profit against the equity owners have invested. A company can have a strong margin and a modest ROE, or the reverse, depending on how much equity capital it uses relative to its revenue.
Can a high ROE be a warning sign rather than a good one?
Yes, if it is driven mainly by heavy debt rather than strong operating profitability. Replacing equity with borrowed capital shrinks the equity base in the ROE formula and can inflate the ratio without the underlying business becoming more efficient.
For a margin-based view of profitability, see the margin calculator. For the return generated on marketing spend specifically, see the ROAS calculator.