Return on Equity Calculator

Calculate return on equity (ROE) from net income and shareholders' equity. Enter net income, beginning and ending equity, and any preferred dividends to see ROE on average equity, ROE on ending equity, and net income available to common shareholders.

Quick Facts

Formula
ROE = Net Income / Average Shareholders' Equity x 100%
Net income available to common shareholders (after preferred dividends) divided by the average of beginning and ending equity.
Why average equity
Smooths mid-period equity changes
Averaging beginning and ending equity reduces distortion from capital raised, dividends paid, or shares bought back during the period.

Your Results

Calculated
ROE (average equity)
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Net income / average shareholders' equity
ROE (ending equity)
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Net income / ending shareholders' equity
Average shareholders' equity
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(Beginning + Ending) / 2
Net income to common
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Net income minus preferred dividends

Ready

Enter net income, beginning and ending equity, and preferred dividends, then press Calculate.

How the Return on Equity Calculator works

Return on equity (ROE) measures how much profit a company generates for each dollar of shareholders' equity invested in the business. It is one of the most widely used profitability ratios in financial analysis because it ties earnings directly to the capital that owners have at stake.

The formula

The standard formula is:

ROE = Net Income / Average Shareholders' Equity × 100%

Average shareholders' equity is the beginning-of-period equity plus the end-of-period equity, divided by two: (Beginning Equity + Ending Equity) / 2. Using the average smooths out the effect of equity changing mid-period from retained earnings, share issuances, buybacks, or dividend payments. Some analysts use ending equity alone for simplicity, which is why this calculator reports both figures.

Preferred dividends and net income to common

If a company has preferred stock outstanding, preferred shareholders are paid their dividend before any return reaches common shareholders. To measure the return earned specifically for common shareholders, subtract preferred dividends from net income first: Net Income to Common = Net Income − Preferred Dividends. This calculator performs that subtraction automatically (it is zero by default for companies with no preferred stock).

Worked example

Take a company with $500,000 of net income, $0 of preferred dividends, beginning equity of $4,000,000, and ending equity of $5,000,000. Average equity is ($4,000,000 + $5,000,000) / 2 = $4,500,000. ROE on average equity is $500,000 / $4,500,000 ≈ 11.11%. ROE on ending equity alone is $500,000 / $5,000,000 = 10% — a reminder that the two methods can give noticeably different answers when equity changed a lot during the period.

Reading the result

ROE has no single "correct" benchmark — what counts as strong varies by industry, capital intensity, and how much debt a company uses. A high ROE driven mainly by heavy borrowing (a low equity base relative to assets) reflects leverage as much as operating performance, so ROE is best read alongside the company's debt level and compared against similar businesses rather than an arbitrary target.

Frequently Asked Questions

How is Return on Equity calculated?
ROE = Net Income / Average Shareholders' Equity × 100%. Average equity is the beginning equity for the period plus the ending equity, divided by two. If preferred dividends were paid, subtract them from net income first so the result reflects the return to common shareholders.
Why use average equity instead of just ending equity?
Shareholders' equity changes during the period as the company earns income, pays dividends, or issues or buys back shares. Averaging the beginning and ending balances reduces distortion from those mid-period changes; dividing by ending equity alone is a simpler but less precise alternative, which this calculator also shows for comparison.
What is considered a good ROE?
There is no universal cutoff. Many investors treat an ROE in the mid-teens to low-20s percent as healthy for a typical non-financial company, but acceptable levels vary widely by industry, capital intensity, and how much debt the company carries. Compare ROE against companies in the same industry rather than against a fixed number.
How do preferred dividends affect the ROE calculation?
Preferred shareholders have a priority claim on earnings before common shareholders. Subtracting preferred dividends from net income before dividing by equity isolates the income actually available to common shareholders, which is what ROE is meant to measure when a company has preferred stock outstanding.

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