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ROE help

Discussion in 'Beginner's Lounge' started by Jason Lermount, Dec 7, 2019.

  1. Jason Lermount

    Jason Lermount

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    I was wondering if anyone could help me with my ROE calculations? I got varied information, one of which says that simply subtracting liabilities from assets on the balance sheet would give us the business' equity, but another said that it is under stockholders equity? And after doing the calculation (in this case for apple) both produced wildly different results, both of which rather implausible.
    1) Net Income / Stockholders equity = 0.61 or 61% --> which from my understanding means that for each dollar a stockholder invests, it returns 61 cents??
    2) Net income / ( assets - Liabilities ) = 0.237 or ~24%

    I understand this is quite a newbie question and probably incredibly simple, but the wild variations in other ROE calculations has left me quite unsure both of my calculation and my understanding.
    Any help is genuinely appreciated, and thank you for your time :)
     
  2. ducati916

    ducati916

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    There are two ways to calculate it:

    (a) ROE = Net profit attributable to shareholders x 100/shareholders equity; or
    (b) ROAE = Net profit attributable x 100/average shareholders equity
    Average Equity = (Equity at prior year-end + equity at latest year end)/2

    Shareholders equity should include intangibles and goodwill not reflected in the Balance Sheet, but after all deductions (not dividends payable to shareholders). Goodwill that has been written off needs to be included in the average calculation.

    jog on
    duc
     
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