How to Calculate Stockholder Equity

Video Transcript

"My name is Phillip Beningoso. I'm an investment professional. And I'm going to be discussing how to calculate Stockholder's Equity. Now return on equity or return on stockholders equity is one of the most important financial matters to consider. When evaluating a business or possible investment. It tells you, how much profit the company is making with the money invested by stockholders. Let me follow some steps here, real quickly to bring you up to speed. The formula for calculating return on stockholders equity is very simple. You take the net income and divide it by the total equity. Both of these figures can be found on an annual report. So let's start with Intel. Intel has a net income of 15 billion and total equity of 30 billion. So if we take the 15 divide by 30, we come up with .5 or 50 percent. If we move the decimal, two places to the right. So what does that actually mean to us? Basically, for every dollar invested in a company. Intel earned 50 cents in 2007. This may seem like a lot. But to understand it, it has a different context. And that deals with really raw materials. The raw materials for a company like Intel, who has a lot of raw material. Spends a great deal of money on the chips and other material. That they need on hand to make chips. Where as another company that would need, absolutely no raw material. Would have a higher return on equity. Because they don't have to have that inventory on hand. So it's important to use this figure correctly. The information provided here is for informational purposes only. And should not be considered an individualized recommendation. Or personalized investment advice. Any investments or strategies mentioned here may not be suitable for everyone. My name is Phillip Beningoso and I'm an investment professional."