Calculate the return on equity on a percent of total equity to net profit. This return on equity calculator helps you determine how successful your investment may be.
Return on Equity Formula
ROE = (net profit / equity) * 100%
- Where ROE is return on equity (%)
- Net profit is revenue – costs
- equity is it total $ amount of your equity
Return on Equity Definition
A return on equity is the total ratio of net profit to total equity spent on a project.
How to calculate return on equity
Let’s take another look at an example of how to calculate a return on equity. Let’s assume you have an investment in real estate that has equity of $1,000,000.00. This is a multi-family home that has 5 units. Each unit brings in $3,000.00 in rent per month after taxes. Now we need to calculate the total yearly income.
5 units * $3,000.00/months * 12 months = $156,000.00
Finally, we can calculate the ROE because we have the total profit and equity.
ROE = $156,000.00/1,000,000.00*100 = 15.6%
This is also a very solid investment, especially if you consider the increase in the value of the real estate itself.
Let’s take a look at an example of how this might be used in practice. Let’s assume you have a 40% stake in a company in equity. This has a value of $40,000.00. Over the past year that equity has earned a total of $10,000.00 in profit. Use the formula above we get the following:
ROE = (10,000/40,000) * 100 = 25%
A 25% return on equity is nothing to scoff at. If you look at it in terms of an investment, a 25% return on assets yearly is an incredible return compared to something like the stock market. In fact, a return on equity that large is almost unheard of on a larger scale.
FAQ
ROE stands for return on equity. It’s a term used to describe the total % return on an investment in an equity.
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