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# Video:How to Calculate Return on Equity

with Joshua Kennon

Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Learn how to calculate return on equity with this helpful video.See Transcript

## Transcript:How to Calculate Return on Equity

Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Shareholder equity is a creation of accounting that represents the assets created by the retained earnings of the business and the paid-in capital of the owners.

### Why Return on Equity Reveals a Company's Earned Profit

A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company's return on equity compared to its industry, the better. If you owned a business that had a net worth (shareholder's equity) of \$100 million dollars and it made \$5 million in profit, it would be earning 5% on your equity (\$5 ÷ \$100 = .05, or 5%). The higher you can get the "return" on your equity, in this case 5%, the better.

### Calculate Return On Equity by Dividing Profit By Shareholder Equity

Return on equity can be calculated by dividing net pofit by the average shareholder equity for the period. Net profit/average shareholder equity for period = Return on equity.