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ROE calculation formula and analysis of profitability of the enterprise

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Return on equity (Return on Equity, Return on Shareholders ’Equity, ROE) shows the efficiency of using your own invested funds and is calculated as a percentage. It is calculated by the formula:

ROE = Net Income / Average Shareholder's Equity

ROE = Net Income / Average Net Assets

Where, Net Income - net profit before dividends on ordinary shares, but after dividends on preferred shares, since equity does not include preferred shares.

ROE can also be represented as follows:

ROE = ROА * Leverage ratio

From the ratio it is clear that the correct use of borrowed funds allows to increase the income of shareholders due to the effect of financial leverage. This effect is achieved due to the fact that the profit received from the activities of the company is significantly higher than the loan rate. By the amount of financial leverage, you can determine how the borrowed funds are used - for the development of production or for patching holes in the budget. Obviously, with good management of the company, the value of this indicator should be more than one. On the other hand, too high a value of financial leverage is also bad, since it can be fraught with high risk, since it indicates a high share of borrowed funds in the structure of assets. The higher this share, the greater the likelihood that the company will generally be left without net profit if it suddenly encounters any even minor difficulties.

A special approach to calculating the indicator is to use the Dupont formula, which breaks down the ROE into components, allowing you to better understand the result:

ROE (Dupont Formula) = (Net Profit / Revenue) * (Revenue / Assets) * (Assets / Equity)

ROE (Dupont Formula) = Return on Net Profit * Asset Turnover * Financial Leverage

In the Russian accounting system, the formula for return on equity ratio takes the form:

ROE = Net income / Average annual cost of equity * 100%

ROE = p. 2400 / ((p. 1300 + p. 1530) at the beginning of the period + (p. 1300 + p. 1530) at the end of the period) / 2 * 100%

To calculate the coefficient for a period other than a year, but to obtain comparable annual data, use the formula:

ROE = Net Profit * (365 / Number of days in the period) / Average annual cost of equity * 100%

According to many economists and analysts, when calculating the coefficient, it is advisable to use the net profit indicator. This is because the return on equity characterizes the level of profit that owners receive per unit of invested capital.

The indicator characterizes the efficiency of using the company's own sources of financing and shows how much net profit the company earns from 1 ruble of its own funds.

ROE allows you to determine the efficiency of use of capital invested by owners, and compare this indicator with the possible receipt of income from the investment of these funds in other activities.

By the way, in world practice, the ROE indicator is used as one of the main indicators of banks' competitiveness.

Return on equity (ROE)

Return On Equity (ROE) is the ratio of the company's net profit to the average annual share capital.

Return on equity characterizes the profitability of a business for its owners, calculated after deducting interest on the loan (i.e. net profit, unlike indicators such as ROA or ROIC, is not adjusted for the amount of interest on the loan).

In addition, sometimes instead of ROE, a Return On Common Equity (ROCE) is used, in this case, the formula of the indicator is as follows:

In all cases, when calculating this coefficient, it is assumed to use data from annual income statements.

If quarterly or other statements are used in the calculation, the coefficient should be multiplied by the number of reporting periods in a year.

Return on equity (Return on equity)

Return on equity (return on equity, ROE) - an indicator of net profit in comparison with the equity of the organization.

In contrast to the similar indicator “return on assets”, this indicator characterizes the efficiency of using not all the capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.

Calculation (formula)

Return on equity is calculated by dividing the net profit (usually per year) by the equity of the organization:

Return on Equity = Net Profit / Equity

To get the result as a percentage, the indicated ratio is often multiplied by 100.

A more accurate calculation involves the use of the arithmetic average of equity for the period for which net profit is taken (usually for a year) - equity is added to equity at the beginning of the period at the end of the period and divided by 2.

To calculate the indicator for a period other than a year, but to obtain comparable annual data, use the formula:

Return on equity = Net profit * (365 / Number of days in the period) / ((Equity at the beginning of the period + Equity at the end of the period) / 2)

A special approach to calculating the return on equity is to use the Dupont formula.

The Dupont formula divides the indicator into three components, or factors, allowing a deeper understanding of the result:

Return on Equity (Dupont Formula) = (Net Profit / Revenue) * (Revenue / Assets) * (Assets / Equity) = Return on Net Profit * Asset Turnover * Financial Leverage

Normal value

According to averaged statistics, return on equity is approximately 10-12% (in the USA and Great Britain). For inflationary economies such as Russia, the rate should be higher.

The main comparative criterion in the analysis of return on equity is the percentage of alternative return that the owner could get by investing his money in another business.

For example, if a bank deposit can bring 10% per annum, and a business brings only 5%, then the question may arise about the advisability of further conducting such a business.

The higher the return on equity, the better. However, as can be seen from the Dupont formula, a high value of the indicator can result from too high financial leverage.

That is, a large share of borrowed capital and a small share of equity, which negatively affects the financial stability of the organization. This reflects the main law of the business - more profit, more risk.

Otherwise, the calculation gives a negative value, unsuitable for analysis.

ROE (Return on Equity)

Return on equity (Return on Equity, Return on Shareholders ’Equity, ROE) shows the efficiency of using your own invested funds and is calculated as a percentage. It is calculated by the formula:

ROE = Net Income / Average Shareholder’s Equity

ROE = Net Income / Average Net Assets

Where, Net Income - net profit before dividends on ordinary shares, but after dividends on preferred shares, since equity does not include preferred shares.

ROE can also be represented as follows:

ROE = ROА * Leverage ratio

From the ratio it is clear that the correct use of borrowed funds allows to increase the income of shareholders due to the effect of financial leverage.

By the amount of financial leverage, you can determine how the borrowed funds are used - for the development of production or for patching holes in the budget.

Obviously, with good management of the company, the value of this indicator should be more than one.

On the other hand, too high a value of financial leverage is also bad, since it can be fraught with high risk, since it indicates a high share of borrowed funds in the structure of assets.

A special approach to calculating the indicator is to use the Dupont formula, which breaks down the ROE into components, allowing you to better understand the result:

ROE (Dupont Formula) = (Net Profit / Revenue) * (Revenue / Assets) * (Assets / Equity)

ROE (Dupont Formula) = Return on Net Profit * Asset Turnover * Financial Leverage

In the Russian accounting system, the formula for return on equity ratio takes the form:

ROE = Net income / Average annual cost of equity * 100%

ROE = p. 2400 / ((p. 1300 + p. 1530) at the beginning of the period + (p. 1300 + p. 1530) at the end of the period) / 2 * 100%

To calculate the coefficient for a period other than a year, but to obtain comparable annual data, use the formula:

ROE = Net Profit * (365 / Number of days in the period) / Average annual cost of equity * 100%

According to many economists and analysts, when calculating the coefficient, it is advisable to use the net profit indicator.

This is because the return on equity characterizes the level of profit that owners receive per unit of invested capital.

The indicator characterizes the efficiency of using the company's own sources of financing and shows how much net profit the company earns from 1 ruble of its own funds.

ROE allows you to determine the efficiency of use of capital invested by owners, and compare this indicator with the possible receipt of income from the investment of these funds in other activities.

By the way, in world practice, the ROE indicator is used as one of the main indicators of banks' competitiveness.

The economic meaning of the indicator

The profitability ratio shows how effectively the invested money was used in the reporting period. It is clear that this indicator is extremely important for investors and business owners.

That is, those assets that are owned by the company as property. How to evaluate the result of calculations:

  1. The higher the ratio, the more efficiently the invested funds are used. Investments are more profitable.
  2. Too high indicator - the financial stability of the organization “suffers”.
  3. The coefficient is below zero - the feasibility of investing in this company is doubtful.

The return on equity ratio is compared with other options for investing free money in assets and securities of other companies. Or with bank interest on deposits, as a last resort.

Calculation in EXCEL

The rate of return on equity is calculated as the quotient of net profit to the average amount of equity investment.

Data is taken for a certain time interval: month, quarter, year. The formula for calculating the profitability ratio of own funds:

ROE = (Net Profit / Average Equity) * 100%

The average value of equity is the calculation formula:

SK = (SK of the beginning of the period + SK of the end of the period) / 2

Return on equity - balance sheet formula:

ROE = (p. 2110 + p. 2320 + p. 2310 + p. 2340) / ((p. 1300 ng + p. 1300 kg + p. 1530 ng + p. 1530 kg) / 2) * 100%

In the numerator - data from the report on financial results (form 2). In the denominator - from the final balance (form 1).

To calculate profitability using Excel tools, we will enter the data for the financial statements of company “X”:

Financial Statement

And the report on financial results (“as before”: profit and loss):

Profits and Losses Report

The tables highlight the values ​​that will be needed to calculate the return on equity ratio.

  • Profitability ratio for 2015: = (6695/75000) * 100% = 8.9%.
  • Profitability ratio for 2014: = (2990/65000) * 100% = 4.6%.

We automate the calculation using Excel formulas. In general, you can make a separate table with important economic indicators.

Enter formulas with links to the values ​​in the relevant reports - and quickly receive data for statistical analysis, comparison and management decisions.

Excel Formulas for Calculating Return on Equity

Elements of the formula are links to cells with corresponding values. In order for the coefficient to be immediately displayed in percent, we set the percentage format and left one decimal place.

  1. The return on equity ratio is growing from 4.6 percent to 8.9 percent.
  2. It is not profitable to invest available funds in the shares of the company “X”. The same bank deposit rate in 2015 amounted to 9.5%.
  3. It is advisable to consider other proposals from enterprises or put money on a deposit at interest (in extreme cases).

The investment attractiveness of the project is not evaluated only by the return on investment. When making a decision, the investor looks at the return on assets, sales and other criteria for the effectiveness of the enterprise.

Profitability indicator

ROE (Return of Equity) - Return on equity - an indicator of return on equity, characterizing the return on equity.

Shows the return on shareholder investments in terms of accounting profit.

Formula for calculating return on equity:

ROE = Net Income / Equity

  • ROE - return on assets
  • Net Income - Net Income
  • Equity - the average annual capital of the company

Comments on using ROE

This indicator is interesting, first of all, for a business that is capital intensive and has to attract significant share capital.

A significant part of the shareholders in this case are investors who consider the enterprise as an object of investments and are interested in the growth of the value of shares.

Also, this indicator is practically the main one if the enterprise is part of a holding or simply a subsidiary.

For enterprises that are able to raise funds through commodity and commercial loans, to use significant deferred payments and other instruments for raising working capital, use indicators such as ROA.

ROE is useful for comparing company profitability with other firms in the same industry.

Investors who want to see a return on equity instead of ROE prefer to value dividends from net profit after deducting dividends on preferred shares

(ROCE) = (net income - dividends on preferred shares) / capital

The average amount of share capital is simplified by adding the amount of share capital at the beginning of the period with the share capital at the end of the period and dividing the result by two.

Investors can also calculate the change in ROE over a period by dividing the current ROE by a previous value for a comparable period.

What shows the return on equity

Return on equity, as well as other indicators of profitability, indicates business performance.

More precisely, with what return the owners' money invested in the capital of the company works.

Return on equity is able to give an idea to the investor or its specialists how successfully the company manages to maintain the return on capital at the proper level and thereby determine its attractiveness for investors.

The system of indicators has a similar indicator - return on assets. However, in contrast to it, the return on equity allows us to judge precisely the work of the net equity of the enterprise.

At the same time, raised funds spent on property acquisition may interfere with the return on assets.

How to find the ratio?

Profitability is always the ratio of profit to that object, the return on which must be estimated. In this case, we are considering equity. So, we will divide the profit into it.

We use this notation, and then the formula for calculating the indicator may look like this:

ROE = Pr / SC × 100,

ROE - desired profitability,
Pr - net profit (return on equity is calculated only for net profit).
SK - equity. To make the calculation more informative, the average SK score is taken. The easiest way to calculate it is to add the data at the beginning and end of the period and divide the result by 2.

Return on equity - a coefficient that is relative in nature, it is usually expressed as a percentage.

Factor analysis

Sometimes a different formula is used for the calculation - the so-called Dupont formula. It has the following form:

ROE = (Pr / Vyr) × (Vyr / Act) × (Act / SK),

where: ROE - desired profitability, Pr - net profit, Vyr - revenue, Act - assets, SK - equity. This is a factor analysis of profitability.

Balance formula

This indicator can be found not only by calculation, but from reporting documents. So, there is a simple answer to the question of how to find equity by balance.

To determine the return on equity, information is used that is contained in the lines of the balance sheet (form 1) and in the statement of financial results (form 2).

The balance formula will look like this:

ROE = строка 2400 формы 2 / строка 1300 формы 1 × 100.

Подробнее о бухгалтерском балансе см. статью «Заполнение формы 1 бухгалтерского баланса (образец)», а о форме 2 — «Заполнение формы 2 бухгалтерского баланса (образец)».

Нормативное значение

The main criterion used in assessing the return on equity is the comparison of this indicator with the return on investments in other areas of the business, for example, in securities of other companies.

The normative value of ROE is widely used to evaluate investment performance. Typically, investors focus on values ​​from 10 to 12%, which are typical for business in developed countries.

If the indicator goes to minus, this is an alarming signal and an incentive in order to increase the return on equity.

But a significant excess over the normative value is also an unfavorable situation, as investment risks increase.

Profitability or return on equity is important for assessing the effectiveness of the enterprise. To find this indicator, several formulas are used, the data for which are taken from the lines of the balance sheet and the report on financial results.

Return on equity

When analyzing financial statements, to assess the profitability and profitability of the enterprise, the return on equity ratio is used.

Icon in formulas (acronym): ROE. Synonyms: cost (price) of equity, return on equity, Return on Equity, Return on shareholders ’equity

The formula for calculating the rate of return on equity:

ROE - return on equity (Return on Equity),%
NI - net profit (Net Income), rubles
EC - equity (Equity Capital), rubles

Destination The coefficient of return on capital characterizes the efficiency of capital use and shows how much the company has net profit from the ruble advanced in capital.

Equity has been developing over the years. It is expressed in accounting estimates, which can differ greatly from the current market value of the company.

For a more detailed analysis, you can use the methodology of 4-factor analysis of return on equity.

Net profit is a part of gross (book) profit, and having performed a 3-factor analysis of gross profit, we can judge the changes in net profit itself.

Example. Determine the ratio of the return on equity of the enterprise in comparison with the industry average. The net profit of the enterprise amounted to 211.4 million rubles. The amount of advanced capital is 1709 million rubles. The industry average value of the coefficient of return on equity is 24.12%.

We calculate the value of the coefficient of return on equity for the enterprise: ROEpr = 211.4 / 1709 = 0.1237 or 12.37%.

Define the ratio of return on capital:
ROEpr / ROEcro = 12.37 / 24.12 = 0.5184 or 51.84%.

The return on equity of the enterprise is 51.84% of the industry average ratio.

Types of profitability

In the economy, there are absolute indicators (revenue, net profit, and so on - they can be found in the statements of companies) and relative indicators, which are calculated by comparing the absolute.

Profitability is just a relative indicator. It compares in general terms various absolute indicators with the company's net profit in percentage form, as if showing how much of the absolute indicator is net profit, thereby characterizing, inter alia, its payback.

The most common types of profitability are:

  1. Return on assets - characterizes how efficiently the company's assets are able to generate profit, shows the share of net profit in the company's assets,
  2. Return on equity - characterizes how efficiently equity (not burdened with obligations) is able to generate net profit, shows the share of net profit in equity,
  3. Return on sales - characterizes the effectiveness of sales, shows the share of net profit in the company's revenue.

Multipliers

To compare some companies with others and calculate the values ​​of various types of profitability, there is a group of special multipliers. Their main ones:

  • ROA (Return On Assets - return on assets),
  • ROE (Return On Equity - return on equity),
  • ROS (Return On Sales - return on sales).

As an example of calculating profitability, we calculate the indicated multipliers for Rosneft.

To accomplish the task, we take the company's IFRS statements for 2016 (for the calculation of multipliers, as a rule, annual reports are taken).

Rosneft balance sheet

From these statements, to obtain the initial data, we need a balance sheet and a profit or loss statement.

Profit and loss statement of Rosneft

To calculate the ROA, we need the total value of the assets, which we can take from the balance sheet, the line “Total assets” - 11,030 billion rubles.

From the profit and loss statement, we should take the value of net profit in the corresponding line - 201 billion rubles.

To calculate the ROE, we need the company's own capital, which is indicated in the balance line - 3 726 billion rubles.

But it can also be calculated as the difference in assets of 11,030 billion rubles. and the amount of short-term obligations (which should be paid in the next 12 months) 2 773 billion rubles. and long-term obligations (which must be paid in a period of more than 12 months) 4 531 billion rubles., That is, a total of 7 304 billion rubles.

It turns out that the value of equity is 3,726 billion rubles. The next step is to divide the net profit of 201 billion rubles. on equity capital of 3726 billion rubles. and multiply by 100, that is, get an ROE of 5.39%.

To calculate the profitability of sales, you should take the value of net profit from the profit and loss statement 201 billion rubles. and the value of revenue from a similar report of 4,887 billion rubles.

Next, the value of net profit of 201 billion rubles should be divided. on the value of revenue 4,887 billion rubles. and multiply by 100 to convert to a percentage. It turns out that ROS is 4.11%.

Due to the volatility of net revenue, it is advisable to calculate the profitability of a business for several periods, while comparing it with similar indicators of other companies in the industry.

Profitability shows the general feasibility of investments for investors - if it is lower than the profitability of risk-free instruments, then investors may prefer them.

Profitability does not reflect the market value of shares. If a company shows good profitability, its shares are often overvalued by the market.

Therefore, it is better to buy securities of such companies on corrections. And the indicators of profitability multipliers should be compared with the data of profitable multipliers - P / E, P / B, P / S.

Indicators, ratio and return on equity formula

Return on equity (eng. ROE, i.e. return on equity,) is an indicator of net profit in comparison with the organization’s own capital.

This is the most important financial return indicator for any investor, business owner, showing how efficiently the capital invested in the business was used.

Return on equity is one of the most important indicators of business efficiency. Any investor, before investing his finances in the enterprise, analyzes this parameter.

It shows how well used are the assets owned by owners and investors. The return on equity ratio reflects the ratio of net profit to equity of the company.

It is clear that such a calculation makes sense when an organization has positive assets that are not burdened by borrowing restrictions.

How to evaluate the return on business?

To do this, it is worth comparing it with indicators of alternative profitability. How much will a businessman get if he invests his money in another business?

For example, he will transfer funds to a bank deposit, which will bring 10% per annum. And the profitability ratio of the existing enterprise is only 5%. It is clear that developing such a company is not practical.

Compare the indicator with the standards that have historically developed in the region. Thus, the average profitability of companies in England and the United States is 10-12%.

In countries with a stable economy, a coefficient in the range of 12-15% is desirable. For Russia - 20%. In each particular state, many factors influence the indicator values ​​(inflation, industrial development, macroeconomic risks, etc.).

High profitability does not always mean high financial results. The higher the ratio, the better. But only when a large share of investments is made up of the company's own funds. If borrowing prevails, the solvency of the organization is at risk.

The predominance of borrowed funds in the calculation gives a negative indicator, practically not suitable for analysis of business returns.

Although categorically relate to the profitability ratio is impossible. Its use in analysis has some limitations.

The real income of the owner or investor does not depend on assets, but on operational efficiency (sales). On the basis of one indicator of return on equity, it is difficult to assess the productivity of a firm.

Be that as it may, the profitability ratio illustrates the company's earnings earned for investors and owners.

Return on equity formula

Return on equity shows the amount of profit a firm will receive per unit of cost of equity. For a potential investor, the value of this indicator determines:

  • The profitability ratio gives an idea of ​​how well the invested capital was used.
  • Owners invest their funds, forming the authorized capital of the enterprise. In return, they receive the right to a percentage of profits.
  • Return on equity reflects the amount of profit that an investor will receive from each ruble advanced in the company.

There are several ways to calculate your profitability ratio. The choice of formula depends on the calculation tasks.

Data is taken from the “Profit and loss account” and “Balance”. If you need to find the ratio in percent, then the result is multiplied by 100.

Formula of net return on equity:

RSK = state of emergency / insurance company (Wed) * 100,

where DGC - return on equity,
PE - net profit for the billing period,
SK (cf.) is the average investment for the same billing period.

An example of calculating a formula. Firm A has its own funds in the amount of 100 million rubles. Net profit for the reporting year amounted to 400 million. DGC = 100 million / 400 million * 100 = 25%.

An investor can compare several enterprises to decide where it is more profitable to invest.

Example. Firm “A” and “B” have the same amount of equity capital, 100 million rubles. The net profit of enterprise A is 400 million, and that of enterprise B is 650 million.

Substitute the data in the formula. We get that the profitability coefficient of the company "A" - 25%, "B" - 15%. The profitability of the first organization was higher due to its own funds, and not due to revenue (net profit).

After all, both enterprises entered into a business with the same amount of capital investment. But company B worked better.

Financial profitability

To get more accurate data, it makes sense to divide the analyzed period into two: calculate income at the beginning and at the end of a certain period of time.

RSK = state of emergency * 365 (days in the year of interest) / ((SKng + SKkg) / 2),

where SKng - equity at the beginning of the year, SKKg - equity at the end of the reporting year.

If the indicator must be expressed as a percentage, then the result, respectively, is multiplied by 100.

What figures are taken from accounting forms?

To calculate net profit (from form No. 2, “Profit and loss statement”, line numbers and their names are indicated):

  1. 2110 "Revenue",
  2. 2320 "Interest receivable",
  3. 2310 "Income from participation in other organizations",
  4. 2340 “Other income”.

To calculate the amount of equity (from form N1, “Balance Sheet”):

  • 1300 "Total for the section" Capital and reserves "" (data at the beginning of the period plus data at the end of the period),
  • 1530 “deferred income” (data at the beginning plus data at the end of the reporting period).

Calculation of the normative level of profitability

How to understand that it makes sense to invest in a business? Return on equity shows the normative value.

The standard rate of return is interest on deposits with banks. This is a certain minimum, a certain limit of determining the return on business.

The formula for calculating the minimum profitability ratio:

RSK (n) = Std * (1 - Stnp),

where DGC (n) is the normative level of return on equity (relative value),
STD - deposit rate (average for the reporting year),
STP - income tax rate (per

Definition

Return on equity (return on equity, ROE) - an indicator of net profit in comparison with the equity of the organization. This is the most important financial return indicator for any investor, business owner, showing how efficiently the capital invested in the business was used. In contrast to the similar indicator "return on assets", this indicator characterizes the efficiency of using not all the capital (or assets) of the organization, but only that part of it that belongs to the owners of the enterprise.

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