Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
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 Ratio Analysis
 Liquidity Ratios
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 Cash Ratio Formula
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 Quick Ratio Formula
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 Current Ratio Formula
 Acid Test Ratio Formula
 Defensive Interval Ratio
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 Net Working Capital Formula
 Changes in Net Working Capital
 Cash Flow from Operations Ratio
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 Operating Cycle Formula
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
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 Solvency Ratios
 Equity Ratio
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 Days Inventory Outstanding
 Days in Inventory
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 Average Collection Period
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 Cash Conversion Cycle
 Cash Conversion Cycle (CCC) Formula
 Fixed Asset Turnover Ratio Formula
 Debtor Days Formula
 Working Capital Turnover Ratio
 Profitability Ratios
 Profitability Ratios Formula
 Common Size Income Statement
 Vertical Analysis of Income Statement
 Profit Margin
 Gross Profit Margin Formula
 Gross Profit Percentage
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 EBIT Margin Formula
 Operating Income Formula
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 EBIDTA Margin
 Degree of Operating Leverage Formula (DOL)
 NOPAT Formula
 OIBDA
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 Return on Sales
 ROIC Formula (Return on Invested Capital)
 Return on Investment Formula (ROI)
 ROIC vs ROCE
 ROE vs ROA
 CFROI
 Cash on Cash Return
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Unit Contribution Margin
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Variable Costing Formula
 Capitalization Rate
 Cap Rate Formula
 Comparative Income Statement
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Asset Ratio Formula
 Coverage Ratio
 Coverage Ratio Formula
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 DSCR Formula (Debt service coverage ratio)
 Financial Leverage Ratio
 Financial Leverage Formula
 Degree of Financial Leverage Formula
 Net Debt Formula
 Leverage Ratios
 Leverage Ratios Formula
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
 Solvency Ratio Formula
Return on Equity Formula
Return on Equity Formula is one of the most common finance formulas shareholders use to find out the return on their investment.
Let’s say that they have invested in a company. Now they will look at the net income of the company for the year and also the shareholders’ equity of the year. Finally, they will compare the two to come up with a ratio. We will call it to return on equity (ROE).
Here’s the formula of return on equity ratio –
Example of ROE Formula
Let’s take a simple example to illustrate return on equity formula.
Grandeur Co. has the following information –
 Net Income for the year 2017 – $120,000
 Shareholders’ Equity – $600,000
Find out the Return on Equity.
By using the formula of return on equity, we get –
 Return on Equity = Net Income / Shareholders’ Equity
 Or = $120,000 / $600,000 = 20%.
The ratio should also be compared with the ROE of similar companies of the same industry to make a sense of whether the ROE of Grandeur Co. is higher or lower.
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Nestle’s ROE Calculation
Let’s calculate ROE of Nestle from the financials provider below –
The consolidated income statement for the year ended 31^{st} December 2014 & 2015
4.8 (388 ratings)
Consolidated balance sheet as at 31^{st} December 2014 & 2015
Source: Nestle.com
 ROE = Net Income / Equity
 Return on Equity (2015) = 9467 / 63986 = 14.8%
 Return on Equity (2014) = 14904 / 71,884 = 20.7%
ROE of Nestle has decreased in 2015 (14.8%) as compared to 2014 (20.7%).
Colgate’s ROE Calculation
Below is a snapshot of the Colgate Ratio Analysis Excel Sheet. You may download this sheet from Ratio Analysis Excel Tutorial.
In this calculation of ROE, we have used Average Equity in the denominator.
In many years, Colgate’s ratio was in the range of 90%.
However, it shot up in 2014 to 126.45% and in 2015 to 327.2%.
Even though the Net income has reduced by 34%, ROE increased during these years because of share buyback and also accumulated losses further lowering the Shareholders equity denominator.
Explanation of ROE Formula
As you can see there are two components of this formula.
The first component is net income.
If you look at the income statement of a company, you would be able to find the net income as the last item. In the case of public companies, you may see that the net income is the second last item. In few countries, it’s mandatory for public companies to show forth earnings per share (EPS) after they calculate the net income for the year.
The second component is the shareholders’ equity.
Here’s a snapshot of how it looks like –
Shareholders’ Equity  
Paidin Capital:  
Common Stock  *** 
Preferred Stock  *** 
Additional Paidup Capital:  
Common Stock  ** 
Preferred Stock  ** 
Retained Earnings  *** 
() Treasury Shares  (**) 
() Translation Reserve  (**) 
Minority Interest  *** 
Once we know the two components, all we need to do is to use the formula to find out the ROE.
Use of Return on Equity Formula
Return on equity is not only the formula of profit; rather it’s a formula of efficiency. By looking at the ratio, we get to know how efficient a company is.
 If the formula results in a higher ratio, it means that the shareholders’ equity has been rightly utilized to produce higher returns.
 On the other hand, if the ratio is lower, it means the efficiency of the company in utilizing its equity is also lower and as a result, the return is also lower.
The higher the ratio better would be the efficiency of the company. Thus, every investor should look at a company that has higher ROE. However, they also need to look at other financial ratios to get a holistic view of how a company has been operating.
Calculator
You can use the following ROE Calculator.
Net Income  
Shareholders' Equity  
Return on Equity (ROE) Formula =  
Return on Equity (ROE) Formula = 


Return on 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 Shareholders’ Equity.
You can easily calculate the real rate of return in the template provided.
Video on Return on Equity ROE Formula
Recommended Articles
This has been a guide to Return on Equity Formula, practical examples, and ROE calculator along with excel templates download. You may also have a look at these articles below to learn more about Financial Analysis
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