How to Calculate Return on Equity (ROE)
Calculating the return on equity, also referred to as ROE, involves observing the profits and earnings of a company and monitoring its ups and downs. Determine the return on equity with financial advice from an experienced portfolio manager in this free video on investing.
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OK so how do we calculate return on equity? Equity generally refers to an equity holding. That would be a share, a one share of stock. And what that equity, the reason it's equity is because you have ownership in a company and you have that fractional ownership. So the return on that equity is going to be the earnings or the profit that the company makes. And you'll see stated earnings, stated dividends being paid out, you'll also see the earnings per share, what does the company make and you're going to need to look at those earnings per share to calculate the return for the equity. So and then it's changing all the time. You look at a percentage because your equity holding, your share price is going to be going up and down all the time, everyday and you need to really concentrate in terms of return on equity, is that return constant? Is it consistent? When the share price goes up, are my earnings going up? And am I continuing to make more money as a company or am I in a situation where the price is going down, the shares, and the earnings are coming down. So that might show that the company's in trouble. But return on equity really is going to be a really a good way to analyze a company and it's only going to be a concern if you see those numbers beginning to come down.