Return on Equity (ROE) Calculator
What Is Return on Equity?
Return on equity measures how much profit a business generates for every dollar of owner equity. It answers a fundamental question every business owner should ask: what return am I actually getting on the money I have invested in this business?
Equity is what remains after subtracting all liabilities from total assets. It represents the owners' stake in the business — accumulated retained earnings, original investment, and any additional capital contributed over time. ROE tells you how productively that equity is being put to work.
The Formula
ROE = Net Income / Shareholders' Equity x 100
Definitions
Net income is the bottom line profit after all expenses including direct costs, overhead, interest, and taxes.
Shareholders' equity is total assets minus total liabilities. On a balance sheet it appears as the owners' equity section and includes paid-in capital, retained earnings, and any other equity accounts. Use the average of beginning and ending equity for the period if equity changed significantly during the year.
The Relationship Between ROE and ROA
ROA measures return on all assets. ROE measures return on just the equity portion. The gap between the two reflects financial leverage — the use of debt to amplify returns. A business with strong ROE and weak ROA is using significant debt to boost returns, which increases risk. A business with similar ROE and ROA is largely equity-financed and carries less financial risk.
A Worked Example
A specialty painting contractor has the following financials:
Net income: $290,000
Shareholders' equity at beginning of year: $1,100,000
Shareholders' equity at end of year: $1,350,000
Average shareholders' equity: $1,225,000
ROE = $290,000 / $1,225,000 x 100 = 23.7%
For every dollar of owner equity, this contractor generates 23.7 cents of profit.
What Is a Good ROE?
ROE benchmarks vary by industry and capital structure. A consistently profitable small business might target ROE above 15%. Higher leverage can inflate ROE without actually improving business performance, so always look at ROE alongside ROA and debt levels for a complete picture.
Track your ROE over time. A rising ROE driven by improving profitability is a positive sign. A rising ROE driven by taking on more debt while profits stay flat is a warning sign.
ROE and Business Value
Investors and buyers pay attention to ROE because it reflects how efficiently management uses owner capital. A business that consistently generates high ROE relative to its industry peers tends to command a higher valuation multiple. If you are thinking about an eventual sale or bringing in outside investors, building a track record of strong ROE is one of the most effective ways to support a higher asking price.