Many investors treat return on equity as a key sign of a strong business. ROE shows how much profit a company earns on the money its owners have invested. A higher figure means shareholders' capital is working harder.
This Return on Equity Calculator takes net income, average shareholder equity, and preferred dividends. It shows ROE, income available to common shareholders, return per $1,000 of equity, and a rating. Investors, business owners, and finance students can use it to check reported figures or test their own numbers.
Table of Contents
- What the Calculator Shows
- How to Use It, Step by Step
- The ROE Formula
- Worked Example
- How to Read the Results
- Why Debt Can Inflate ROE
- Limitations and Assumptions
- FAQs About the Return on Equity Calculator
What the Calculator Shows
Results update as you type, so there is no calculate button. The tool returns five results.
- Return on Equity Ratio: the main ROE percent, shown to one decimal place.
- Income Available to Common: net income minus preferred dividends.
- Return Per $1,000 Equity: profit earned for every $1,000 of equity.
- Shareholder Equity Base: the equity figure you entered, in dollar format.
- ROE Performance Category: a rating label based on fixed ROE bands.
- Copy ROE Breakdown and Reset buttons.
How to Use It, Step by Step
- Enter yearly profit after taxes in Total Net Income ($). Type a loss as a negative number.
- Enter Average Shareholder Equity ($). Add starting and ending equity, then divide by 2.
- Enter Preferred Dividends Paid ($). Use 0 if the company has no preferred stock, since a blank field is not accepted.
- Read the ROE figure and the four result cards below it.
- Press Copy ROE Breakdown to copy a summary, or Reset to restore the sample figures.
The ROE Formula
The tool uses the common shareholder version of ROE. Preferred dividends come out first because they belong to preferred holders.
Net Income-Preferred Dividends÷Average Equity=ROE %
- Income available to common = net income - preferred dividends.
- ROE = income available to common ÷ average shareholder equity × 100.
- Return per $1,000 of equity = ROE ÷ 100 × 1,000.
Shareholder equity is total assets minus total liabilities on the balance sheet. For the cleanest result, enter common equity, excluding any preferred stock.
Worked Example
Desmond reviews a regional food distributor. Its equity went from $7,400,000 to $8,200,000 over the year, an average of $7,800,000. Net income was $1,240,000, and preferred dividends were $90,000.
| Result | Calculation | Output |
|---|
| Income Available to Common | $1,240,000 - $90,000 | $1,150,000.00 |
| Return on Equity Ratio | $1,150,000 ÷ $7,800,000 × 100 | 14.7% ROE |
| Return Per $1,000 Equity | 14.744% × $1,000 | $147.44 Return |
| Shareholder Equity Base | Equity entered | $7,800,000.00 |
| ROE Performance Category | ROE between 10% and 15% | Moderate Capital Return |
Each $1,000 of common equity earned about $147 that year. If preferred dividends were ignored, ROE would read 15.9% and look better than it is.
How to Read the Results
Return on Equity Ratio is the headline figure. Compare it with the company's prior years and with close competitors.
Income Available to Common is the profit left for common shareholders. It is also the top half of the basic EPS formula.
Return Per $1,000 Equity restates ROE in dollars. It helps when you explain results to people who dislike percents.
ROE Performance Category uses fixed bands:
- 20% or more: Exceptional Return (20% or more).
- 15% up to 20%: Strong Capital Return.
- 10% up to 15%: Moderate Capital Return.
- Below 10%: Low Capital Efficiency.
These bands are general guidance. Typical ROE varies a lot by industry, so a "low" label may be normal for some sectors.
Why Debt Can Inflate ROE
ROE only counts owners' money, so borrowing can lift it. A company that funds growth with loans has less equity, which makes the same profit look larger.
The DuPont method splits ROE into return on assets times an equity multiplier. Check the first part with our return on assets calculator. Then test leverage with the debt-to-equity calculator.
High ROE paired with heavy debt carries more risk. Profit quality matters too.
The profit margin calculator shows how much of each sales dollar becomes profit. To see results per share, try the EPS calculator.
The dividend payout ratio calculator shows how much profit goes back to shareholders as cash. Browse related ratio tools in the finance and business tools hub.
Limitations and Assumptions
- You must average equity yourself. The tool uses whatever figure you enter.
- Equity must be above $0. Zero or negative equity shows N/A, since a loss over negative equity would look like a strong return.
- If preferred dividends exceed net income, a note appears. Income available to common then shows as a negative amount, such as -$20,000.00.
- The category bands are fixed and do not adjust for industry or debt levels.
- Bands are checked against ROE rounded to one decimal, so the label always matches the figure on screen.
FAQs About the Return on Equity Calculator
What is return on equity in simple terms?
ROE is profit divided by the money owners have in the business. It shows how many cents of profit each equity dollar earned.
Why subtract preferred dividends?
Preferred shareholders get paid before common shareholders. Removing their dividends shows the return that truly belongs to common owners.
What is a good ROE?
It depends on the industry and on how much debt the company uses. Compare a company with its own history and its direct peers.
Can ROE be negative?
Yes. A net loss produces a negative ROE. The tool shows it as a negative percent with the Low Capital Efficiency label.
Should I use average or ending equity?
Average equity is more accurate because profit builds up over the whole year. Use ending equity only if earlier figures are not available.
This calculator gives planning estimates only and is not financial advice. Reviewed for general accuracy by Prof. Dr. Khalil Mudassar, PhD.