How do I calculate return on equity?

Divide net income attributable to the parent by shareholders' equity. The whole question is which equity figure: the average of the beginning and ending balances, or the ending balance alone. On income of 150,000 with equity moving from 1,000,000 to 1,500,000, the average divisor gives 150,000 ÷ 1,250,000 = 12.00% and the ending divisor gives 150,000 ÷ 1,500,000 = 10.00%. This page prints both, plus the average equity they were built from.

Should the denominator be average equity or ending equity?

Average equity matches a flow of income to a period, and it is the standard choice when equity moved during the year, because the income was earned while equity was moving and dividing by the closing balance ignores that. Ending equity answers a different question — what the company earns on the book value that exists today — and it is the right one if you are evaluating the equity as it stands now. When equity barely moved, the two agree and the choice is academic.

Why does this page print two different returns on equity?

Because the difference between them is information. The gap between the two is a measure of how much the equity base moved during the year, and its sign tells you the direction: when the return on ending equity is higher than the return on average equity, the denominator shrank; when it is lower, the denominator grew. Income of 150,000 on equity falling from 1,000,000 to 600,000 gives 18.75% on average equity and 25.00% on ending equity, and that jump is the buyback or the write-off, not an improvement in the business.

Is a high return on equity always good?

No. Debt substitutes for equity, so two identical businesses with the same income report different figures if one is funded with borrowings — the levered one has the smaller equity base and therefore the higher ratio. A shrinking equity base does the same, whether it shrank through buybacks, through dividends paid out, or through a loss recorded outside the income statement. And equity is a book figure, so a company that has repurchased stock for years can show a large return on a denominator far below what the business is worth. Read it against peers in the same industry and beside the company's debt.

What net income goes in the numerator?

The profit attributable to the parent company's common shareholders, after interest and after tax. If the company consolidates a subsidiary it does not wholly own, part of that subsidiary's profit belongs to the minority holders and is not the shareholders' — the income statement reports it separately, and it is excluded here. That distinction matters most for companies with large partly-owned subsidiaries, where consolidated net income can be materially larger than the figure the owners actually earned.

Can the return on equity be negative, or the ratio meaningless?

The return can be negative whenever the company reports a loss, and that is a perfectly ordinary answer. The ratio stops being meaningful when equity itself is small or negative, which happens after sustained buybacks or large write-offs: dividing a profit by a tiny or negative book value produces an enormous or nonsensical figure rather than an error. A negative denominator is why a value that looks like a spectacular return can mean the opposite; check the equity figures on either side of the income before reading anything into the percentage.

Return on Equity Calculator

Result

12.00%

Return on equity (average equity) (%)

Return on equity (ending equity) (%): 10.00%
Average shareholders' equity: 1,250,000.00

Return on equity is a profitability ratio: the net income a company earned divided by the shareholders equity that stood behind it. It is the number that tells you what the owners' money turned into over a year, and it is the one ratio where the arithmetic is uncontroversial and the denominator is not. A year of income flows in continuously, but equity is a balance that moves as it flows, so there are two defensible divisors and they give different answers. This page prints both. One divides by the average of the beginning and ending equity, which matches a flow to a period; the other divides by the ending balance, which is what the owners' stake actually is on the closing date and what a return on today's book value means. Below are the two figures and the average equity they were built from, so you can see exactly how much of the gap is the convention.

One year of income at 150,000, and six different ending equity balances

Ending equity	Average equity	Return on equity (%)	Return on ending equity (%)
600000	800000	18.75	25
800000	900000	16.67	18.75
1000000	1000000	15	15
1200000	1100000	13.64	12.5
1400000	1200000	12.5	10.71
1600000	1300000	11.54	9.38

Every row is the same year — 150,000 of income, equity starting at 1,000,000 — and the only thing that changes is where equity ends up, so reading down the table is reading what a moving cost of capital does to a single year's return. The third row is the axis: when equity ends where it started, average equity and ending equity are both 1,000,000 and the two ratios coincide at 15.00%, because there is nothing for the convention to disagree about. Above it equity grew, and the return on average equity stays ahead of the return on ending equity; below it equity shrank, and the order reverses. Read the first and last columns together and the shape of the trap becomes visible: as ending equity falls from 1,000,000 to 600,000 the return on ending equity climbs from 15.00% to 25.00% on exactly the same income and exactly the same beginning balance, so the improvement is entirely in the denominator. Note too that the first column moves in steps of 200,000 while the average moves in steps of 100,000, which is the arithmetic of averaging: each change in the closing balance moves the divisor by half as much. That is the reason the averaging convention exists — it stops a single closing balance from dominating a figure meant to describe a whole year.

Formula

Return on equity = Net income attributable to the parent ÷ ((Beginning equity + Ending equity) ÷ 2)

Net income: The profit for the period belonging to the parent company's shareholders — after interest, after tax, and after subtracting the part of a consolidated subsidiary that belongs to minority holders
Beginning equity: Shareholders' equity on the first day of the period: the book value of the owners' stake before this year's result is added to it
Ending equity: Shareholders' equity on the last day: the beginning balance plus this year's income, plus or minus anything else that moved it — new shares issued, buybacks, dividends paid, and the accumulated other comprehensive income that never passes through the income statement
Average equity: (Beginning + ending) ÷ 2, printed beside the two ratios because it is the divisor of the first one; it is what makes a flow and a stock comparable over a period
Return on equity: Net income divided by average equity — the main figure, and the one that is right when equity moved a lot during the year
Return on ending equity: Net income divided by ending equity — the same numerator over the closing balance, which answers a different and equally reasonable question: what does the company earn on the book value that exists today

Use it to compare how hard the owners' money is working across companies, and to watch one company over time. Because both the numerator and the denominator come straight off the statements, it needs no estimates, which is why it is the first profitability ratio most people meet. Read it on a company whose equity barely moved and the two divisors agree, so the choice does not matter. Read it on a year when equity moved a lot — a large buyback, a big share issue, a write-off — and the choice is the whole answer, which is why this page prints both rather than picking for you. Three cautions. Equity is a book figure, so a company that has bought back stock for years can show a high return on a denominator that no longer reflects what the business is worth. Debt raises it: a company that funds itself with borrowings has less equity behind the same income, so a levered company can outrank a better one on this ratio alone. And it is not comparable across industries whose balance sheets are shaped differently; compare it against peers, not against the whole market.

Worked examples

Income of 150,000 on equity that grew from 1,000,000 to 1,500,000
1. Average equity: (1,000,000 + 1,500,000) ÷ 2 = 1,250,000
2. Return on average equity: 150,000 ÷ 1,250,000 = 0.12, so 12.00%
3. Return on ending equity: 150,000 ÷ 1,500,000 = 0.10, so 10.00%
4. The gap: 12.00% − 10.00% = 2.00 points, and it exists only because equity grew during the year
The default, and the case that shows why this page prints two numbers. Same income, same company, two defensible answers 2 points apart. The average divisor is the fairer one here: the 150,000 was earned across twelve months during which equity was mostly below its closing level, so dividing by the closing figure understates the return. The ending divisor is not wrong, it is answering a different question — what the company earns on the book value that exists today, which is the question you are asking if you are deciding whether to buy the equity now.
Income of 120,000 on equity that grew from 900,000 to 1,100,000
1. Average equity: (900,000 + 1,100,000) ÷ 2 = 1,000,000
2. Return on average equity: 120,000 ÷ 1,000,000 = 12.00%
3. Return on ending equity: 120,000 ÷ 1,100,000 = 0.10909…, so 10.91%
4. The gap this time: 1.09 points, smaller than the default because equity grew proportionally less
A gentler version of the same case, and the one that shows the gap is not a fixed offset — it scales with how far the denominator moved. A round average equity of exactly 1,000,000 is a good reminder of what the divisor actually is: the amount of owners' money that was in the business, on average, over the year. Nothing about the income figure changed between the two examples; the whole difference in both ratios comes from the equity columns.
When equity shrinks: 150,000 on equity falling from 1,000,000 to 600,000
1. Average equity: (1,000,000 + 600,000) ÷ 2 = 800,000
2. Return on average equity: 150,000 ÷ 800,000 = 0.1875, so 18.75%
3. Return on ending equity: 150,000 ÷ 600,000 = 0.25, so 25.00%
4. Now the ending divisor gives the larger answer, because equity fell
The same income as the default example and a much better-looking return, produced entirely by a smaller denominator. Equity fell by 400,000 — a buyback, a large dividend, or a loss taken through other comprehensive income rather than through the income statement — and the return on the closing balance jumped to 25%. This is the shape of the ratio that rewards shrinking the equity base, and it is why a rising return on equity is not by itself evidence that the business improved. Compare the two numbers on this page before concluding anything: when the return on ending equity runs well above the return on average equity, the denominator fell during the year.

Limitations

Four things to hold on to. The numerator is net income attributable to the parent, not consolidated net income: if the company owns less than all of a subsidiary, the minority holders' share of that subsidiary's profit is not the common shareholders' and is excluded. The denominator is a book value, which is what the accounting records say the owners' stake is, not what the market thinks it is worth — for a company that has bought back stock for years, book equity can be small or negative relative to the business, and the ratio stops being meaningful. The two ratios on this page differ only in the divisor, so any comparison across companies has to use the same one on both sides; pairing one company's return on average equity with another's return on ending equity is a comparison of conventions, not of businesses. And a high figure is not automatically good: debt substitutes for equity, so a highly levered company reports a higher return on equity than an identical unlevered one on the same income, and an equity base that has shrunk through buybacks or write-offs lifts the ratio without anything improving. Compare within an industry, over several years, and read it next to the debt the company carries.

Frequently asked questions

How do I calculate return on equity?: Divide net income attributable to the parent by shareholders' equity. The whole question is which equity figure: the average of the beginning and ending balances, or the ending balance alone. On income of 150,000 with equity moving from 1,000,000 to 1,500,000, the average divisor gives 150,000 ÷ 1,250,000 = 12.00% and the ending divisor gives 150,000 ÷ 1,500,000 = 10.00%. This page prints both, plus the average equity they were built from.
Should the denominator be average equity or ending equity?: Average equity matches a flow of income to a period, and it is the standard choice when equity moved during the year, because the income was earned while equity was moving and dividing by the closing balance ignores that. Ending equity answers a different question — what the company earns on the book value that exists today — and it is the right one if you are evaluating the equity as it stands now. When equity barely moved, the two agree and the choice is academic.
Why does this page print two different returns on equity?: Because the difference between them is information. The gap between the two is a measure of how much the equity base moved during the year, and its sign tells you the direction: when the return on ending equity is higher than the return on average equity, the denominator shrank; when it is lower, the denominator grew. Income of 150,000 on equity falling from 1,000,000 to 600,000 gives 18.75% on average equity and 25.00% on ending equity, and that jump is the buyback or the write-off, not an improvement in the business.
Is a high return on equity always good?: No. Debt substitutes for equity, so two identical businesses with the same income report different figures if one is funded with borrowings — the levered one has the smaller equity base and therefore the higher ratio. A shrinking equity base does the same, whether it shrank through buybacks, through dividends paid out, or through a loss recorded outside the income statement. And equity is a book figure, so a company that has repurchased stock for years can show a large return on a denominator far below what the business is worth. Read it against peers in the same industry and beside the company's debt.
What net income goes in the numerator?: The profit attributable to the parent company's common shareholders, after interest and after tax. If the company consolidates a subsidiary it does not wholly own, part of that subsidiary's profit belongs to the minority holders and is not the shareholders' — the income statement reports it separately, and it is excluded here. That distinction matters most for companies with large partly-owned subsidiaries, where consolidated net income can be materially larger than the figure the owners actually earned.
Can the return on equity be negative, or the ratio meaningless?: The return can be negative whenever the company reports a loss, and that is a perfectly ordinary answer. The ratio stops being meaningful when equity itself is small or negative, which happens after sustained buybacks or large write-offs: dividing a profit by a tiny or negative book value produces an enormous or nonsensical figure rather than an error. A negative denominator is why a value that looks like a spectacular return can mean the opposite; check the equity figures on either side of the income before reading anything into the percentage.

References

17 CFR 210.5-03 — the income statement line items, where net income attributable to the controlling interest is separated from the noncontrolling interest that this page's numerator excludes — U.S. Securities and Exchange Commission rule, via the Electronic Code of Federal Regulations (United States)
17 CFR 210.5-02 — the balance sheet line items, the source of the beginning and ending shareholders' equity the denominator is built from — U.S. Securities and Exchange Commission rule, via the Electronic Code of Federal Regulations (United States)
Net Income — Investor.gov glossary, the figure that sits in the numerator — U.S. Securities and Exchange Commission, Investor.gov (United States)
Earnings Per Share — Investor.gov glossary, the other widely quoted measure built on the same net income figure, with a denominator the opposite way round (shares rather than equity) — U.S. Securities and Exchange Commission, Investor.gov (United States)

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