what does the return on stockholders' equity show course hero

Return on stockholder's equity is calculated by dividing net income by average stockholder's equity. Sample Response Return on total assets measures the profitability of the total assets without considering how these assets are financed. Return on stockholder's equity measures the profitability of the stockholder's investment.

Full Answer

What Does Return on Equity (ROE) Tell You?

How to calculate return on equity?

What Is the Difference Between Return on Assets (ROA) and ROE?

What is a good ROE?

How Do You Calculate ROE?

Why is ROE high?

Why is ROE considered a measure of a corporation's profitability?

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What Does Return on Equity (ROE) Tell You?

Whether ROE is deemed good or bad will depend on what is normal among a stock’s peers. For example, utilities have many assets and debt on the balance sheet compared to a relatively small amount of net income. A normal ROE in the utility sector could be 10% or less. A technology or retail firm with smaller balance sheet accounts relative to net income may have normal ROE levels of 18% or more.

How to calculate return on equity?

Enter the formula for "Return on Equity" =B2/B3 into cell B4 and enter the formula =C2/C3 into cell C4.

What Is the Difference Between Return on Assets (ROA) and ROE?

However, whereas ROE compares net income to the net assets of the company, ROA compares net income to the company’s assets alone, without deducting its liabilities. In both cases, companies in industries in which operations require significant assets will likely show a lower average return.

What is a good ROE?

As with most other performance metrics, what counts as a “good” ROE will depend on the company’s industry and competitors. Though the long-term ROE for S&P 500 companies has averaged around 14%, specific industries can be significantly higher or lower. All else being equal, an industry will likely have a lower average ROE if it is highly competitive and requires substantial assets in order to generate revenues. On the other hand, industries with relatively few players and where only limited assets are needed to generate revenues may show a higher average ROE.

How Do You Calculate ROE?

To calculate ROE, analysts simply divide the company’s net income by its average shareholders’ equity. Because shareholders’ equity is equal to assets minus liabilities, ROE is essentially a measure of the return generated on the net assets of the company. Since the equity figure can fluctuate during the accounting period in question, an average shareholders’ equity is used.

Why is ROE high?

However, an extremely high ROE is often due to a small equity account compared to net income, which indicates risk.

Why is ROE considered a measure of a corporation's profitability?

Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of a corporation's profitability in relation to stockholders’ equity.

What does it mean when a company reports a return on equity of 12%?

For example, if a company reports a return on equity of 12% for several years, it is a good indication that it can continue to reinvest and grow 12% into the future.

How to find return on equity?

It is obtained by taking the net income of the business divided by the shareholders’ equity. Net income is the total revenue minus expenses and taxes that a company generates during a specific period.

What is dividend policy?

Dividend Policy A company’s dividend policy dictates the amount of dividends paid out by the company to its shareholders and the frequency with which the dividends are paid. by showing its decision to pay profits earned as dividends to shareholders or reinvest the profits back into the company. On the balance sheet, shareholders’ equity is broken ...

What is a negative shareholder?

The shareholders’ equity can either be negative or positive. A negative shareholders’ equity means that shareholders will have nothing left when assets are liquidated and used to pay all debts owed. On the other hand, positive shareholder equity shows that the company’s assets have been grown to exceed the total liabilities, ...

Why are investors wary of negative shareholder equity?

Investors are wary of companies with negative shareholder equity since such companies are considered risky to invest in, and shareholders may not get a return on their investment if the condition persists. For example, if the assets are liquidated in a negative shareholder equity situation, all assets will be insufficient to pay all of the debt, and shareholders will walk away with nothing. Shareholders’ equity can help to compare the total amount invested in the company versus the returns generated by the company during a specific period.

What is shareholder equity?

Shareholders’ equity refers to the owners’ claim on the assets of a company after debts have been settled. It is also known as share capital. Share Capital Share capital (shareholders' capital, equity capital, contributed capital, or paid-in capital) is the amount invested by a company’s. , and it has two components.

What is retained earnings statement?

Statement of Retained Earnings The statement of retained earnings provides an overview of the changes in a company's retained earnings during a specific accounting cycle. It is structured as an equation, such that it opens with the retained earnings at the beginning of the reporting period, makes adjustments for items such as net income and dividends

What Does Return on Equity (ROE) Tell You?

Whether ROE is deemed good or bad will depend on what is normal among a stock’s peers. For example, utilities have many assets and debt on the balance sheet compared to a relatively small amount of net income. A normal ROE in the utility sector could be 10% or less. A technology or retail firm with smaller balance sheet accounts relative to net income may have normal ROE levels of 18% or more.

How to calculate return on equity?

Enter the formula for "Return on Equity" =B2/B3 into cell B4 and enter the formula =C2/C3 into cell C4.

What Is the Difference Between Return on Assets (ROA) and ROE?

However, whereas ROE compares net income to the net assets of the company, ROA compares net income to the company’s assets alone, without deducting its liabilities. In both cases, companies in industries in which operations require significant assets will likely show a lower average return.

What is a good ROE?

As with most other performance metrics, what counts as a “good” ROE will depend on the company’s industry and competitors. Though the long-term ROE for S&P 500 companies has averaged around 14%, specific industries can be significantly higher or lower. All else being equal, an industry will likely have a lower average ROE if it is highly competitive and requires substantial assets in order to generate revenues. On the other hand, industries with relatively few players and where only limited assets are needed to generate revenues may show a higher average ROE.

How Do You Calculate ROE?

To calculate ROE, analysts simply divide the company’s net income by its average shareholders’ equity. Because shareholders’ equity is equal to assets minus liabilities, ROE is essentially a measure of the return generated on the net assets of the company. Since the equity figure can fluctuate during the accounting period in question, an average shareholders’ equity is used.

Why is ROE high?

However, an extremely high ROE is often due to a small equity account compared to net income, which indicates risk.

Why is ROE considered a measure of a corporation's profitability?

Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a measure of a corporation's profitability in relation to stockholders’ equity.