How do you calculate return on equity (ROE)?
The return on equity ratio (ROE) will indicate the overall return in which the organizations shareholders will be entitled to. This calculation will display the amount of money that was earned for each share for each dollar value of its common equity.
This ratio will simply be impacted by a company’s net income, as opposed to opposed to other profitability ratios that will include other factors such as assets and contributed capital. ROE will be calculated by dividing the company’s total net income by its average shareholders’ equity.
For example, if Bali Yacht Company generated $50 of net income on average shareholder equity of $150, then the ROE would be 1/3^{rd} or 33%. Not bad!
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What is the formula to calculate ROI?
ROI stands for return on investment. ROI will be calculated by dividing the company’s total net income by its average invested capital. ROI can be a very useful metric to compare returns on your invested capital. Check out the example for Catalina Heli below!