How to Calculate Rate of Return on Common Stock Equity

By Motley Fool Staff – Updated Apr 30, 2025 at 9:58PM

Key Points

Return on equity (ROE) measures profit per dollar of equity, aiding evaluation of a company's efficiency.
To compute ROE, divide net income by shareholders' equity from a company's 10-K.
High ROE signals strong management and business health.
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Return on equity, often abbreviated as ROE, is a financial metric used to judge the strength of a business by answering this key question: How much profit does it generate as a function of the cash it has to work with? In other words, one dollar of equity translates into exactly how many dollars of earnings?

The best businesses and the most skilled management teams will typically produce a consistently high rate of return on common stock equity.

A stock chart rising on a blue background.

Image source: Getty Images.

You should be able to look up ROE figures on the stocks you own through your broker. But to calculate ROE in your own, you only need two figures, both of which are available in a company's 10-K annual report. First, grab net income from the income statement (sometimes it's called "net earnings" and found in the "earnings statement"). Next, pull shareholders' (or "stockholders'") equity from the balance sheet. Divide the first figure by the second, and voila, you've figured out the return on stock equity.

Net income / shareholders' equity = return on stock equity (ROE)

Example calculation

Here's an example calculation using home improvement giant, Home Depot's (HD -0.66%) fiscal 2014 results. That year, the retailer booked a total of $6.3 billion of profit, or net earnings. Home Depot also had $9.3 billion of stockholders' equity on its books as of the end of 2014. Dividing $6.3 billion (income) by $9.3 billion (equity) yields a rate of return on equity of 68%. That percentage means that Home Depot generated $0.68 of profit for every $1 that management had available to work with in 2014.

Why ROE matters

Consistently high rates of return on equity are unusual in the business world. In fact, Home Depot's 68% figure puts it in the top 3% of the 500 companies that make up the S&P 500 index.

That's why ROE is one number that legendary investor and Berkshire Hathaway CEO Warren Buffett often discusses when he is talking about strong businesses. In his 1987 letter to shareholders, for example, Buffett noted that Berkshire's largest divisions as a group earned a 57% ROE that year, which was higher than any of the 1,000 largest publicly traded companies. "You'll seldom see such a percentage anywhere, let alone at large, diversified companies" with no debt, he said.