Return on Average Equity (ROAE)

Article bySayantan Mukhopadhyay
Reviewed byDheeraj Vaidya, CFA, FRM

What is Return on Average Equity?

Return on Average Equity (ROAE) extends the ratio of Return on Equity. Instead of the total equity at the end of the period, it takes an average of the opening and the closing balance of equity for some time. It is calculated as Net earnings divided by Average total equity.

Here’s the formula –

Key Takeaways

  1. The return on average equity ratio considers a company’s opening and closing equity balances instead of the total balance. 
  2. One can calculate this by dividing the net income by the average shareholders’ equity. Moreover, in the net income, interest expense is calculated. 
  3. The investors interpret the outcome in two ways: Higher ratio indicates appropriate utilization of the shareholders’ equity, whereas a lower ratio indicates inefficiency in caring for the shareholders’ equity.
  4. Companies should be mindful of their use of shareholders’ equity and keep bad decisions at bay. 
Return on Average Equity (ROAE)

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In this ROSE formula, there are two components.

The first component is net income.

The second component of the formula is the average shareholders’ equity.

Video Explanation of Return on Average Equity


Example of Return on Average Equity

Let’s take practical examples.

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.

First, we will calculate the average of shareholders’ equity by simply adding the beginning and the ending figures and 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%.


Below are the balance sheet details of Colgate from 2008 to 2015. You can download this sheet from Ratio Analysis TutorialRatio Analysis TutorialRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial more.

Colgate ROSE has remained healthy in the last 7-8 years. Between 2008 to 2013, Return on Equity was around 90%.

Colgate 2

In 2014, Return on Equity was at 126.4%, and in 2015, it jumped significantly to 327.2%.

Ratio Analysis Colgate

This has happened despite a 34% decrease in 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 buybackShare BuybackShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the more and accumulated losses that flow through the Shareholder’s Equity.

How to Interpret this Ratio?

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 will get an idea about the efficiency of the company’s shareholders’ equity 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, the management isn’t efficient enough to manage and utilize the shareholders’ equity.

Return on Average Equity Formula Calculator

You can use the following Calculator.

Net Income
Average Shareholders' Equity
Return on Average Equity Formula

Return on Average Equity Formula =
Net Income
Average Shareholders' Equity
= 0

Calculate Return on Average Equity 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 Shareholder’s Equity.

You can easily calculate the return on average equity in the template provided.

Return on Average Equity in excel

You can download this template here – Return on Average Equity Excel Template.

Return on Average Equity Video


Frequently Asked Questions (FAQs)

What is a good figure for return on average equity?

A considerable figure for return on average equity would be 15-20% which looks good to the investors and shareholders. Analysts use it to evaluate the fiscal performances of dissimilar companies in the same industry.

Which is better, high or low ROAE?

Return on equity or average equity refers to the return it generates from the net income and shareholders’ equity. It is profitable if the return is higher since that indicates proper usage of the company’s profit conversion.

What is the importance of return on equity?

Return on equity is an important metric to understand the management caliber and productivity of the business and comprehend how well the company takes charge of its equity against its net income.

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This has been a guide to Return on Average Equity and its meaning. Here we discuss the formula to calculate Return on Average Equity and practical examples and its interpretation. Here we also provide you with ROSE Calculator with a downloadable excel template.