ROE calculator and formula
ROE is net income divided by book equity. On $15,000,000 of net income and $100,000,000 of equity, ROE is 15 percent. Financial leverage sits inside this ratio. ROIC tries to take it out.
Return on equity
15.00%
$15,000,000 of net income on $100,000,000 of book equity.
- Net income
- $15,000,000
- Book equity
- $100,000,000
- ROE
- 15.00%
Figures on this page are in millions of dollars. Profit after interest and tax.
Shareholders' equity on the balance sheet, not market cap.
The formula
Net income is profit after interest and tax. Equity is book equity, not market cap. The ratio is in percentage points: 15, not 0.15.
A return on the residual claim
Net income is what is left after interest. Book equity is the residual claim on the balance sheet. Divide one by the other and you have a rate of return on that residual.
On $15,000,000 of net income against $100,000,000 of equity, ROE is 15 percent. The shareholders' book claim earned 15 cents on the dollar this period.
ROIC divides NOPAT by invested capital instead. NOPAT is before interest. Invested capital includes the debt. ROE puts the financing in both the numerator (interest already deducted) and the denominator (equity only). That is why a recapitalisation can lift ROE without the operations having improved.
The same profit on a thinner equity slice
Keep net income at $15,000,000 and cut equity to $75,000,000. ROE rises to 20 percent. Profit did not rise. The book claim it is measured against shrank.
Borrowing to buy back equity, or simply running a more borrowed sheet, does this. The operations can be unchanged. ROE still prints a higher rate. Compare it with ROIC on the same year before calling the rise an operating improvement. The pair is laid out on ROE against ROIC.
Less profit, same equity
Net income is now $8,000,000 on the original $100,000,000 of equity. ROE is 8 percent.
The denominator did not move. The profit after interest did. A higher coupon, a worse year, or both. Coverage of that coupon is a different ratio, on the interest coverage calculator.
What this page is not doing
It is not ROIC, not a market-value return, and not a DuPont split into margin, turnover and financial leverage. DuPont is the identity that writes ROE as those three pieces. This page is the one division.
Book equity of zero or negative makes the ratio unusable, the way negative earnings make P/E unusable. This calculator will not print a rate in that case. Fifteen percent on the teaching sheet is $15,000,000 over $100,000,000. This is educational material, not financial advice.
Worked examples
\$15,000,000 on \$100,000,000 of equity
Net income is $15,000,000. Book equity is $100,000,000. What is ROE?
- ROE is net income over equity: , which is 15 percent.
- The shareholders' book claim earned 15 cents on the dollar this period.
ROE is 15 percent.
The same profit on \$75,000,000 of equity
Keep net income at $15,000,000. Equity is now $75,000,000. What is ROE?
- ROE: , which is 20 percent.
- Profit did not change. The equity slice shrank.
ROE rises to 20 percent. The operations need not have improved.
\$8,000,000 on the original equity
Net income is $8,000,000. Equity is $100,000,000. What is ROE?
- ROE: , which is 8 percent.
- The denominator is the first sheet's equity. The profit after interest fell.
ROE is 8 percent.
The mistake that costs the most
Calling a rise in ROE an operating improvement when the equity slice shrank, or mixing ROE with ROIC as if they priced the same capital.
On the second sheet, ROE went from 15 percent to 20 percent because equity fell from $100,000,000 to $75,000,000. Net income was still $15,000,000. The operations did not earn more. The residual claim got smaller.
ROIC on the same firm can be unchanged. Read both. The compare page is the pair.
Common questions
Book equity or market cap?
Book equity. ROE is an accounting return. A market-value return is a different object, closer to what a shareholder actually earned on the price paid.
Why does borrowing lift ROE?
If the operations earn more on the borrowed money than the after-tax interest costs, the residual goes to equity and ROE rises. If they earn less, ROE falls. That is financial leverage in the ratio, which is why ROIC is the cleaner operating read.
Is 15 percent a good ROE?
It is $15,000,000 over $100,000,000 on the teaching sheet. Compare it with the cost of equity, and with ROIC against WACC, before treating the rate as a score. This is educational material, not financial advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.