How to calculate Return on Equity from balance sheet

by Sovrenn Education Maximize your returns with our expert guide on sel

What is ROE or return on equity?

Return on Equity (ROE) is a financial metric that measures the profitability of a company in relation to its shareholders' equity. The formula for calculating ROE is:

Here's how you can find the necessary information on the balance sheet to calculate ROE:

Locate Net income calculator

Net income can usually be found on the income statement rather than the balance sheet. It represents the company's total revenue minus all expenses and taxes. You can use the net income from the most recent income statement.

Read More: Why Does ROE Matter?

Calculate Shareholders' Equity

Shareholders' equity is the residual interest in the assets of the company after deducting liabilities. On the balance sheet, you'll find shareholders' equity in the equity section, which is typically broken down into common stock, additional paid-in capital, retained earnings, and other components. The formula for shareholders' equity is:

Alternatively, some balance sheets might explicitly list shareholders' equity without the need for calculation.

Also Read: How Does a Balance Sheet Work?

Return on Equity (ROE) Calculation

Once you have both the net income and shareholders' equity, you can use the formula mentioned earlier to calculate ROE. Multiply the result by 100 to express it as a percentage.

ROE measures how well a company uses shareholders' money to make profits. A higher ROE usually shows good financial health. However, comparing it with industry standards and other factors is essential. Different industries have different average ROEs. A steady ROE is often more beneficial than a one-off high one.

Read More: The Fundamental Formula for Market Success

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Created on Dec 21st 2023 01:37. Viewed 141 times.


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