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 Return on Average Equity (ROAE)
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Return on Average Equity Formula (Table of Contents)
ROAE – Return on Average Equity Formula
Many investors want to know how much net income is being generated by using the shareholders’ equity. And that’s why we take the net income into account and then divide the whole net profit by shareholders’ equity.
Here’s the return on average equity formula –
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Example of Return on Average Equity
Let’s take a practical example of return on average equity formula.
Big Brothers Company has the following information for you –
 Net Income for the year – $45,000
 The beginning figure of shareholders’ equity – $135,000
 The ending figure of shareholders’ equity – $165,000
Find out the return on average equity (ROAE) of Big Brothers Company.
Here first we will calculate the average of shareholders’ equity by simply adding the beginning and the ending figures and then dividing the sum by 2.
Here’s the calculation –
 Average shareholders’ equity = ($135,000 + $165,000) / 2 = $150,000.
 Net income for the year is $45,000.
Using the ratio of ROAE, we get –
ROAE Formula = Net Income / Average Shareholders’ Equity = $45,000 / $150,000 = 30%.
RETURN ON EQUITY CALCULATION OF COLGATE
Below is a balance sheet details of Colgate from 2008 to 2015. You can download this sheet from Ratio Analysis Tutorial.
Colgate Return on Average Equity (ROAE) has remained healthy in the last 78 years. Between 2008 to 2013, Return on Equity was around 90% on an average.
In 2014, Return on Equity was at 126.4% and in 2015, it jumped significantly to 327.2%.
This has happened despite 34% decrease in the Net Income in 2015. Return on Equity jumped significantly because of the decrease in Shareholder’s
Equity in 2015. Shareholder’s equity decreased due to share buyback and also because of accumulated losses that flow through the Shareholder’s Equity.
Explanation of Return on Average Equity Formula
In this ROAE formula, there are two components.
The first component is net income.
 We can find the net income in the income statement of the company. Net income is the last item on the income statement. We calculate the net income by deducting the operating expenses and other related and unrelated expenses from the operational revenue and other incomes of the company.
 However, here since we are calculating the proportion only on the basis of shareholders’ equity, we shouldn’t deduct interest expense in the net income here.
 Since we are not taking debt into account in this ratio; it doesn’t make sense to include the cost of debt (interest expense) in the formula.
 However, if the company is wholeequity company (and there’s no debt), then we won’t need to consider any such measure.
The second component of the formula is average shareholders’ equity.
 Shareholders’ equity is an important financial statement which we often include under the balance sheet.
 In shareholders’ equity, we can include common shares, preferred shares, and dividend.
 To find out the average of the shareholders’ equity, we need to consider both the beginning figure of shareholders’ equity and also the ending figure of the shareholders’ equity. Once we have the two figures, we will just use the simple average to find out the average shareholders’ equity.
 However, we need to take a refined approach if there are more equity transactions during the period. Then it’s better to use the weighted average method to find out average.
Use of ROAE Return on Average Equity Formula
This ROAE ratio helps us understand how well shareholders’ equity is used to generate net income. If an investor wants to invest in the common shares, she would get an idea about the efficiency of the shareholders’ equity of the company by using this ratio.
 If the ratio is higher, it indicates that the shareholders’ equity is properly utilized during the period to generate the net income.
 If the ratio is lower, it indicates that the management isn’t efficient enough to manage and utilize the shareholders’ equity.
Return on Average Equity Formula Calculator
You can use the following Return on Average Equity Calculator.
Net Income  
Average Shareholders' Equity  
Return on Average Equity Formula =  
Return on Average Equity Formula = 


Return on Average Equity Formula in Excel (with excel Template)
Let us now do the same example above in Excel.
This is very simple. You need to provide the two inputs of Net Income and Average Shareholders Equity.
You can easily calculate the return on average equity in the template provided.
You can download this return on average equity template here – Return on Average Equity Excel Template
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This has been a guide to Return on Average Equity formula, its uses along with practical examples. Here we also provide you with ROAE Calculator with downloadable excel template.
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