Calculating Cost of Goods Sold and Inventory Cost
How Tax Deferrals Work
Reconciling Bank Accounts for Your Business

Figuring the Return on Equity (ROE) Ratio

The return on equity (ROE) ratio tells you how much profit a business earned in comparison to the book value of its owners’ equity. This ratio is especially useful for privately owned businesses, which have no easy way of determining the market value of owners’ equity.

ROE is also calculated for public corporations, but, just like book value per share, it generally plays a secondary role and is not the dominant factor driving market prices.

Here’s how you calculate the return on equity ratio:

Net income ÷ Owners’ equity = ROE

The business whose income statement and balance sheet are shown in the two figures below earned $32.47 million of net income for the year just ended and has $217.72 million of owners’ equity at the end of the year. Therefore, its return on equity (ROE) is 14.9 percent, as shown below:

$32,470,000 net income ÷ $217,720,000 owners’ equity = 14.9% ROE
An income statement example for a business.
An income statement example for a business.
A balance sheet example for a business.
A balance sheet example for a business.

Net income increases owners’ equity, so it makes sense to express net income as the percentage of improvement in the owners’ equity.

blog comments powered by Disqus
Preparing to Close Out a Business’s Journals
Tracking Cash: Bookkeeping Musts after You Get the Money
Checking Out Computerized Journal Records for Your Business
Financial Accounting and Reporting by Government and Not-for-Profit Entities
Flow of Credits and Debits in Double-Entry Bookkeeping
Advertisement

Inside Dummies.com