ROE (Return on Equity) is one of the indicators used by stock market investors to analyze stocks. Indicates the management's ability to transform the invested capital into profit. The higher the ROE, the more the company is able to create money with the same capital invested.
Steps
Calculate Return on Equity (ROE) Step 1
Step 1. Calculate the Net Equity (PN) by subtracting the Total Liabilities (TP) from the Total Investments (TI)
(PN = TI - TP), or alternatively Share Capital + Secondary Interest + reserves and profits = PN.
Calculate Return on Equity (ROE) Step 2
Step 2. Calculate the average equity from the beginning (PN1) to the end (PN2) of the year:
(PNmed = (PN1 + PN2) / 2).
Calculate Return on Equity (ROE) Step 3
Step 3. Find the Net Profit (UN) represented in the company's official balance sheet
Calculate Return on Equity (ROE) Step 4
Step 4. The ROE is calculated by dividing the net profit by the average net worth:
(ROE = UN / PNmed).
Advice
Companies with a ROE between 15 and 25% are absolutely exceptional cases.
Companies that have a ROE of less than 5% should be avoided.
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