How to Calculate Return on Equity (ROE)

by Contributor ; Updated September 14, 2015

When analyzing a stock, one of the key measures of a company's performance is its Return on Equity or ROE. The magnitude of this number can give you insight into the company's operating performance and help you evaluate whether or not the company's stock makes a good investment. A higher ROE usually indicates that a company is performing well, while a lower ROE usually indicates that it could be doing better. Here's how to calculate ROE.

Locate the Balance Sheet or Statement of Shareholders' Equity. After you have done so, identify the common shareholders' equity for the current year (lets call it CSE1) and the common shareholders' equity for the previous year (CSE2).

Calculate the average common shareholders' equity (CSE Avg) for the most recent year and the previous year by using this formula: CSEavg = (CSE1 + CSE2)/2

Locate the net income (NI) for the year in which you want to calculate ROE. This can be found near the bottom of the income statement for the most recent year.

Finally, calculate the ROE: ROE = NI/CSEavg This gives you your final answer which is the ROE of the company you are analyzing.