15–20% is often seen as strong, but compare with the industry and check how much of it comes from leverage.

Why can ROE be misleading?

Leverage, buybacks and write-downs all reduce equity and raise ROE without any improvement in the business.

How do I calculate ROE for common shareholders?

Use net income minus preferred dividends in the numerator and common equity only in the denominator.

Return on Equity (ROE) Formula

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Return on Equity (ROE) Calculator

Return on equity measures the profit a company earns for each unit of capital its shareholders have invested and left in the business. It divides net income by average shareholders’ equity. To measure the return to common shareholders only, subtract preferred dividends from net income first.

Formula

ROE = Net incomeAverage shareholders’ equity × 100%

Where

Net income: profit after tax (less preferred dividends if you want return on common equity)
Average equity: (beginning + ending shareholders’ equity) ÷ 2

Calculator

Net income

Equity, beginning of period

Equity, end of period

Result and step-by-step solution

Return on equity

30%

Shareholders earned 0.30 for each 1.00 of their equity.

Average equity
280,000.00 + 320,000.002 = 300,000.00
Divide net income by it
90,000.00300,000.00 = 30%

How to use the formula

ROE is the headline profitability measure for many investors, but it has to be read carefully. Debt increases ROE when the business earns more on its assets than it pays in interest, so a high ROE can come from risky leverage rather than good operations. Share buybacks and accumulated losses also shrink equity and push ROE up. The DuPont analysis separates these effects.

With net income of 90,000 and equity of 280,000 at the start of the year and 320,000 at the end, average equity is 300,000 and ROE is 30%. Sustainable growth is often estimated as ROE × retention ratio, which links this page to the dividend payout ratio. If equity is negative, ROE is meaningless even if it prints as a number.

Frequently asked questions

What is the ROE formula?: ROE = net income ÷ average shareholders’ equity × 100%.
What is a good ROE?: 15–20% is often seen as strong, but compare with the industry and check how much of it comes from leverage.
Why can ROE be misleading?: Leverage, buybacks and write-downs all reduce equity and raise ROE without any improvement in the business.
How do I calculate ROE for common shareholders?: Use net income minus preferred dividends in the numerator and common equity only in the denominator.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.