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Summary: Return on equity is calculated by taking the net income and dividing it by the shareholder's equity, or the total amount of money the shareholder's have put into the company. Use return on equity to measure the efficiency of business management with help from two accountants in this free video on business calculations and accounting.
Spencer Cottam and Jeannine Smith work together at Account Team in Salt Lake City, Utah.read more
"Hi there I'm Spence I'm with Account Team and we are in Salt Lake City. And we help people with their accounting and tax problems and helping small businesses kind of get going when they are in trouble. And it's been a lot of fun. I'm here to talk to you today about what return on equity means. If you run a small business or even you are trying to buy stock for a large business you want to look at how much they make compared to how much money people have put into the company. So return on equity would be the net income divided by the shareholder's equity or the total amount of money the shareholder's have put into the company. This is used to measure the efficiency of management, it tells you if they are doing a good job with the money and can make a lot of money with the money they've been given. Or if they are having to struggle so it's very important to look at return on equity when you are analyzing stock you want to buy or if you have a small company, your banker will look at this to see how well you are doing and see if he wants to lend to you."
eHow Article: How to Calculate Return on Equity