A company’s return on equity (ROE) measures its net income relative to its total owners’ equity. The ROE signals to investors how well the company generates income using the investors’ capital.  

The formula for calculating ROE is the following:

ROE = Net Income for the Period / Average Total Equity

Average Total Equity = (Beginning Total Equity + Ending Total Equity) / 2

Example ROE Calculation

Company Alpha wants to calculate its ROE for the first six months of its 2023 fiscal year. The company’s income statement and balance sheet show the relevant financial figures:

  • Net Income from January 1, 2023, to June 30, 2023, is $40,000.
  • Total Shareholder Equity as of January 1, 2023, is $200,000
  • Total Shareholder Equity as of June 30, 2023, is $240,000
  • Dividend Distributions during 2023: None

Average Total Equity = ($200,000 + $240,000) / 2
Average Total Equity = $220,000

ROE = $40,000 / $220,000
ROE = 0.18

Company Alpha’s ROE is 18% for the first six months of 2023.