Return on equity calculator: ROE, return on total capital and net margin
Enter revenue, net profit, interest, equity and total assets to see return on equity, return on total capital and return on sales straight away.
Short answer
Return on equity (ROE) = net profit ÷ equity × 100%. Return on total capital = (net profit + interest) ÷ total assets × 100%. With 96,000 net profit, 15,000 interest, 300,000 equity and 800,000 total assets, ROE is 32.0% and return on total capital 13.9%. Return on sales is 96,000 ÷ 1,200,000 = 8.0%.
Return on equity calculator
Profit and interest from the profit and loss account, capital from the balance sheet. Ideally use the average of the opening and closing balance. Any currency works.
- Net profit margin (return on sales)
- 8.0%
- Cost of debt
- 3.0%
- Return on total capital
- 13.9%
- Return on equity (ROE)
- 32.0%
Return formulas
| Ratio | Formula | Example |
|---|---|---|
| Return on equity (ROE) | net profit ÷ equity × 100% | 96,000 ÷ 300,000 = 32.0% |
| Return on total capital | (net profit + interest) ÷ total assets × 100% | 111,000 ÷ 800,000 = 13.9% |
| Return on assets (ROA), simple | net profit ÷ total assets × 100% | 96,000 ÷ 800,000 = 12.0% |
| Return on sales (net margin) | net profit ÷ revenue × 100% | 96,000 ÷ 1,200,000 = 8.0% |
| Cost of debt | interest ÷ liabilities × 100% | 15,000 ÷ 500,000 = 3.0% |
Return on total capital adds interest back to profit, because lenders and suppliers fund part of the assets and interest is their reward. That makes it comparable with the interest rate. The simple ROA leaves interest out. Some analysts use operating profit (EBIT) instead; that gives a slightly higher figure because tax has not yet been deducted. Pick one definition and stick to it.
Use the average of the opening and closing balance sheet for capital if you have both. Profit is earned over the year; capital on a single date can be distorted by an investment or a dividend.
Financial leverage: why ROE is higher than return on total capital
In the example the company earns 13.9% on all its capital and pays 3.0% interest on the borrowed part. The difference goes to the owners, which is why ROE at 32.0% is far higher. This is financial leverage.
Leverage works both ways. If return on total capital falls below the interest rate, in a bad year for example, every borrowed pound or euro pushes ROE further down. A high ROE with a low equity ratio also means more risk.
What is a good return on equity?
| Ratio | Rule of thumb for small businesses |
|---|---|
| ROE | Above what the money would earn elsewhere, plus a premium for business risk. Often 10 to 20% or more |
| Return on total capital | Above the interest rate you pay on loans |
| Return on sales | Depends heavily on the sector: 2 to 5% in trade, 10% or more in consulting and software |
Compare mainly with your own previous years and with companies in the same sector. A 32% ROE on equity that is almost gone says little. Always read returns and solvency together.
How to improve returns
- Raise margins. A higher return on sales lifts ROE and return on total capital. Check your prices with the margin calculator.
- Tie up less capital. Less stock and faster collection reduce the capital you need. See the working capital calculator.
- Sell idle assets. A building or machine that earns little drags return on total capital down.
- Review financing. Borrowing below your return on total capital raises ROE, but only while profit is stable.
Getting the figures from your accounts
Revenue, net profit and interest are in the profit and loss account, equity and total assets on the balance sheet. Connect Xero, QuickBooks Online or Exact Online to DigiData and the financial dashboard shows returns, solvency and EBITDA per month, without waiting for the annual accounts.
Frequently asked questions
What is the difference between profit and return?
Profit is an amount; return relates that profit to the capital needed to earn it. Two companies with 100,000 profit are equally profitable, but the one that needed 500,000 of capital earns a better return than the one that needed 2 million.
Do I calculate ROE with profit before or after tax?
Usually after tax, because that is what the owners keep. To compare companies with different tax positions, use profit before tax and say so.
What if equity is negative?
Then ROE means nothing: a loss divided by negative equity gives a positive percentage. Look at return on total capital, solvency and liquidity instead.
Is return on sales the same as net profit margin?
Yes. Return on sales, net profit margin and net margin are names for the same thing: net profit divided by revenue. Gross margin is different: it only deducts the cost of sales.
Returns every month, not just in the annual accounts
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