Calculated from the sample figures using the displayed formula.
What is the return on equity ratio formula?
Net income ÷ Average shareholders’ equityReturn on equity relates earnings available under the selected definition to average shareholders’ equity.
What do the inputs mean?
- Net income
- The value entered for net income. Keep its period and units consistent with the other inputs.
- Average shareholders’ equity
- The value entered for average shareholders’ equity. Keep its period and units consistent with the other inputs.
How to calculate it step by step
- Define the decision.
Write down what the result will help you compare or decide. - Collect matching inputs.
Use figures from the same period and apply the definitions shown on this page. - Apply the formula.
Net income ÷ Average shareholders’ equity. - Check the units.
Confirm whether the result is a currency amount, percentage, number of periods or ratio. - Test a second case.
Change one assumption at a time to see what drives the result.
Worked example
Using the sample figures in the calculator, the result is 15%. Change one figure at a time and recalculate to see which assumption has the greatest effect. A spreadsheet should return the same result when it uses the same formula, units and timing.
When should you use return on equity ratio formula?
Use it to assess profitability relative to owners’ invested book capital.
Limitations and common mistakes
Leverage and share repurchases can raise ROE without improving operations.
Do not mix annual figures with monthly figures, ending balances with averages, or percentages with whole numbers. Record the definition used so another person can reproduce the result.
Frequently asked questions
What is return on equity ratio formula?
Return on equity relates earnings available under the selected definition to average shareholders’ equity.
How should I use return on equity ratio formula?
Use the formula only after matching every input to the same period, unit and definition. Then compare the result with a worked example and the decision you are trying to make.
What is the most common mistake with return on equity ratio formula?
Leverage and share repurchases can raise ROE without improving operations.
Can I calculate return on equity ratio formula in a spreadsheet?
Yes. Reproduce the displayed equation with separate cells for each input, keep percentages as decimals, and test the spreadsheet against the worked example before replacing the sample figures.
Sources and methodology
This page uses the Beginners’ Guide to Financial Statements for the underlying financial or reporting context. Spreadsheet-related behavior is checked against Microsoft’s financial-function documentation. Examples are illustrative and use the formula displayed on the page.