The Return on Equity KPI measures your organization’s ability to generate revenue for each unit of shareholder equity. Use the following formula when calculating return on equity:
Net income ÷ Shareholder’s equity
The return on equity ratio not only provides a measure of your organization’s profitability, but also your efficiency. A high or improving ROE demonstrates to your shareholder’s that you’re using their investments to grow your business.
- Shareholder’s equity: Financing acquired through selling common and preferred shares to investors.
- Net income: Also called net profit, this is the amount of earnings after you subtract cost of goods sold, taxes, and other expenses.
- A return on equity rate between 15% and 25% is generally considered good.