How to Calculate Return on Stockholder Equity

Series Summary

More than half of America's work force is spending more than they make, and they feel like they can never get ahead. Aside from trying to convince their boss to double their salary, is there a solution to the exhausting psychological effects of barely scraping by? Tracking your expenses, investing in sound decisions and creating a personal financial budget is a great place to start. In this free video series, an investment professional provides advice for stockholders, including how to calculate returns on stockholder equity and how to calculate stockholder equity. Discover how to issue stock as well, how to value stock and how to avoid stock scams. With this financial planning advice, stockholders are well-prepared to face any investment question they may encounter.

Video Transcript

"My name is Phillip Beningoso I'm an investment professional and I'm going to be discussing how to calculate return on a stockholder's equity. Now return on equity or stockholder's equity, R.O.E. is one of the most important financial measures to consider when evaluating a business for possible investment. That tells you how much profit the company is making with the money invested by stockholders. Let me give you a couple of steps here for calculating and understanding R.O.E. The formula for calculating return on equity is actually very simple. Take the company's net income and divided it by it's total equity. You can find both of these numbers on a company's annual report. Lets take an example here real quickly like Microsoft for 2007. I grabbed their annual report and that says that their net income $14.06 billion and the total stockholder's equity was $31.1 billion. If we take the $14.06 and divide it by $31.1 we come up with $.45 and we move the decimal two places to the right and get 45%. So what does that really actually mean to us? Well basically for every dollar invested in a company Microsoft earned $.45. This can be very misleading statistic in the sense that it deals mainly with raw materials. Microsoft is a company that doesn't really have raw materials on hand. They use employees to make their software. So this would probably have more importance or significance to say a furniture company that has raw material on hand. So Microsoft would have a higher R.O.E. based on not having raw materials then a furniture company would have a lower R.O.E. based on having inventory on hand. Any information provided here is for general informational purposes only and should not be considered individualized recommendations or personalized investment advice. Any investments or strategy's mentioned here may not be suitable for everyone. My name's Phillip Beningoso and I'm an investment professional."