Return on equity is determined using. What is return on equity expressed in?

The essence of profitability indicators

Definition 1

Profitability characterizes the profitability of an activity. This is a relative indicator, expressed in the ratio of invested funds and income received. The value of the indicator has only positive values, since if the enterprise receives a loss, profitability indicators are not calculated.

There are no standard values ​​for profitability indicators as such, but various sources you can find average values ​​by industry, country, etc.

Note 1

Profitability indicators most fully reflect the efficiency of the enterprise, therefore they are widely used when carrying out financial analysis. Profitability can be analyzed both for the enterprise as a whole and for individual areas of activity.

When making a decision to invest funds, it is necessary to compare the organization’s profitability indicators with similar enterprises in other industries, interest rates on bank deposits, return on securities, etc. If the profitability of the enterprise chosen for investment is lower than the income level compared to others possible ways investment of funds and profitability does not show growth dynamics, then you should abandon the placement of capital in this enterprise.

Note 2

Return on equity reflects the income received per unit of invested funds.

Return on Equity Indicators

During the financial analysis, the following return on capital indicators are calculated:

• Return on total capital is expressed as the ratio of profit before tax and average annual cost total assets
• Return on equity on net profit is calculated as the ratio of net profit to the average annual value of total assets
• Return on long-term investments is the ratio of profit before tax to the amount of equity capital and long-term liabilities. This indicator is most interesting to investors when making decisions about investing funds, as it shows the efficiency of using invested funds.
• Return on fixed capital - the ratio of profit before tax to the average annual cost of fixed assets
• Return on working capital - the ratio of profit before tax to the average annual cost of working capital
• Return on equity is the ratio of net profit to the average annual cost of equity. This indicator is most interesting to the owners of the enterprise, as it characterizes the efficiency of using the owner’s funds.
• Return on debt capital is the ratio of profit before tax to the amount of borrowed capital.

Note 3

It should be understood that the greater the share of borrowed funds in the total capital of the enterprise, the lower the profitability due to fees for the use of borrowed resources (fee for using a loan, interest rate under a loan agreement, etc.).

When conducting financial analysis, return on capital indicators are considered in dynamics. If the indicators of the reporting period deteriorate compared to the previous one, the analysis identifies and analyzes the reasons for the decrease in profitability and possible ways problem solution.

In addition to the profit margin, when calculating return on capital, you can use the revenue indicator from product sales. In this case, the calculation characterizes the level of sales for each ruble of investment in the property of the enterprise.

Return on equity ROE is a ratio that shows the amount of profit per unit of equity value. Read how to calculate it, what restrictions on use there are, and also see an example of the calculation.

What does return on equity show?

What does an investor want to know when choosing an acquisition target? What income will the capital invested in the project bring and how great are the risks of investment at this level of profitability. What does a business owner want to know when making a decision about the fate of the company? Does the company bring him an income that is comparable to the risks in this business and higher than the return on alternative investments? Maybe a deposit would be better?

The return on equity (ROE) ratio answers the questions of investors and business owners. It is also called the profitability ratio own funds. Return on equity is a ratio that shows the amount of profit that an enterprise will receive on.

Return on equity formula

ROE = (Net profit for the period / Average equity for the period) x 100%

Return on equity formula for calculating the balance sheet

To calculate the return on equity ratio based on the organization’s balance sheet, the following formula is used:

ROE = (line 2400 Form 2 / line 1300 Form 1) x 100%

The data for the formula is taken from Form 2 of the Profit and Loss Statement and Form 1 of the Balance Sheet in the new edition.

How to calculate the return on equity ratio according to IFRS

According to IFRS the formula will look like this:

RSC= ROE =Net Income After Tax / Shareholder’s Equity,

where Net Income After Tax – net profit after taxes,

Shareholder's Equity – share capital.

Excel model for calculating and analyzing return on equity

Download a ready-made Excel model that will calculate return on equity and indicate the factors that caused the indicator to change compared to the previous period.

Standard ROE value

ROE important criterion in making investment decisions, both for the investor and for the business owner, because return on equity characterizes the profit that the owner will receive from a ruble of investment in the enterprise. The higher the value of the indicator in comparison with the alternative in terms of profitability, the more reasons to invest in this enterprise. The value of profitability below the level of alternative investments for an investor is a factor in project rejection, for a business owner it is a factor in making negative decisions about the future of the company, but the business owner compares ROE primarily with the average profitability in the industry and interest rate in economics.

Some domestic sources call the standard value of the ROE ratio 20%. This value can be used as a guide for calculations. But for comparative analysis companies should use the industry value for companies in the same industry or the national average, if such statistics are available to the analyst.

Example of calculating return on equity

Let's calculate ROE using the above formula. For example, let's take annual reporting conditional company.

Table 1. Company balance sheet, million rubles.

	Indicator name
	Intangible assets
	Results of implementations and developments
	Fixed assets
	Profitable investments in material assets
	Financial investments
	Other noncurrent assets
	TOTAL for section I
	II. Current assets
	Value added tax on purchased assets
	Financial investments (excluding cash equivalents)
	Cash and cash equivalents
	TOTAL for section II
	III. Capital and reserves Authorized capital
	Own shares purchased from shareholders
	Revaluation of non-current assets
	Additional capital (without revaluation)
	Reserve capital
	retained earnings
	TOTAL for Section III
	IV. long term duties Borrowed funds
	Deferred tax liabilities
	Estimated liabilities
	Other obligations
	TOTAL for section IV
	V. Current liabilities Borrowed funds
	Accounts payable
	revenue of the future periods
	Estimated liabilities
	Other current liabilities
	Total for Section V

Table 2. Report on the financial results of the company, million rubles.

	Indicator name
	Cost of sales
	Gross profit
	Business expenses
	Administrative expenses
	Profit (loss) from sales
	Profit (loss) from participation in other organizations
	Interest receivable
	Percentage to be paid
	Other income
	other expenses
	Profit (loss) before tax
	Current income tax
	Permanent tax liabilities (assets)
	Change in deferred tax liabilities
	Change in deferred tax assets
	Net income (loss)

Table 3. ROE calculation

The company showed an extremely low return on equity in 2017, but the negative indicator of the previous year justifies such values. It can be stated that the company has begun to reach the level of profitability.

Negative profitability is generally a negative assessment for a business - the company brings losses to its owners, such an asset is difficult to sell and is worth buying only if there are very good reasons for this, such as prospects for profit growth in the future. You will have to build a predictive business model and estimate return on capital in the future.

An important nuance - a business owner, when deciding on the fate of his company based on ROE, must understand that average value equity capital for a period is not at all the same as market price company at the time of decision making. So, if he is not satisfied with the return on the capital he has invested, perhaps the market value of the company is already significantly lower than the investments made and before selling the company it is necessary to improve its finances. That is, ROE alone is not enough to make a final decision.

Return on equity (ROE, return on equity) - financial indicator, expressing return on equity. Close to the indicator return on investment ROI.
The indicator shows the ratio of net profit for the period to the equity capital of the enterprise.

Formula for calculating ROE ratio

ROE = PE / SK
, Where:
PE - net profit;
SK - equity capital.

Net income does not include dividends on common stock, and equity does not include preferred stock.

Benefits of ROE

ROE ratio is one of the most important indicators for investors, top managers, owners of the enterprise, as it shows the effectiveness of their own investments (with the exception of borrowed funds).

Disadvantages of ROE

Analysts question the authenticity ROE indicator, considering that return on equity ratio overestimates the company's value. There are 5 factors that make ROE not completely reliable:

• Long project duration - the longer the analysis period, the higher the ROE.
• A small share of total investments on the balance sheet. The smaller the share the higher the ROE.
• Uneven depreciation. The more uneven the depreciation is during the reporting period, the higher the ROE.
• Slow return on investment. The slower the project pays off, the higher the ROE.
• Growth rates and investment rates. The younger the company, the faster the growth of the balance sheet, the lower the ROE.

Calculation of ROE ratio complicated by the fact that if we analyze a company with a high share of attracted capital in balance sheet, then the ROE calculation will not be transparent. If the net asset value is negative, the calculation of ROE and its subsequent analysis are ineffective.

Standard ROE value

ROE norm for developed countries it is 10-12%. For developing countries with high inflation rates - many times more. On average, 20%. Roughly speaking, return on equity is the rate at which a company attracts investment.
Analysis of return on equity ratio by division of the company (by business area) can clearly show the effectiveness of investing funds in one or another area of ​​business, for the production of one or another product or service. Also for the investor ROE comparison for two companies in which he has an interest, can show the most effective in terms of return.
When assessing standard value of ROE It's worth considering replacement costs. If on this moment available securities with a low risk indicator, yielding 16% per annum, and the main line of business gives an ROE of 9%, then the ROE goal should be set higher, or the business as a whole should be reviewed.

Return on equity is one of the most important indicators of business efficiency. Any investor, before investing his finances in an enterprise, analyzes this parameter. It shows how well the assets belonging to owners and investors are used.

An example of the equity formula in Excel can be downloaded.

The return on equity ratio reflects the ratio of net profit to the company's equity. It is clear that such a calculation makes sense when the organization has positive assets that are not burdened with borrowing restrictions.

Estimation of return on equity

The following indicators influence return on equity:

• efficiency of operating activity (net profit from sales);
• return of all assets of the organization;
• ratio of own and borrowed funds.

How to evaluate the return of a business by looking at the profitability ratio?

1. Compare it with alternative return indicators. How much will a businessman get if he invests his money in another business? For example, he will take the 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 inappropriate.
2. Compare the indicator with the standards historically established in the region. Thus, the average profitability of companies in England and the USA is 10-12%. In countries with stable economies, a ratio of 12-15% is desirable. For Russia – 20%. In each specific state, the values ​​of the indicator are influenced by many factors (inflation, industrial development, macroeconomic risks, etc.).
3. High profitability does not always mean high financial results. The higher the ratio, the better. But only when the majority of investments are the enterprise’s own funds. If debt prevails, the solvency of the organization is at risk.

Thus, a huge debt load is dangerous for the financial stability of the company. It is useful to calculate return on equity if the company has this same capital. The predominance of borrowed funds in the calculation gives a negative indicator, practically unsuitable for analyzing the return of a business.

Although one cannot be categorical about the profitability ratio. Its use in analysis has some limitations. The real income of the owner or investor does not depend on assets, but on operating efficiency (sales). It is difficult to assess the productivity of a company based on a single indicator of the return on its own capital investments.

Most companies have significant amounts of debt. The same banks exist only on borrowed funds (attracted deposits). And their net assets serve only as a guarantor of financial stability.

Be that as it may, the profitability ratio illustrates the income a company earns for investors and owners.

How to calculate the return on equity?

The company's return on equity shows the amount of profit that the company will receive per unit of equity value. For a potential investor, the value of this indicator is decisive:

1. The profitability ratio gives an idea of ​​how well the invested capital was used.
2. The owners invest their funds, forming authorized capital enterprises. In return, they are entitled to a percentage of the profits.
3. Return on equity reflects the amount of profit that an investor will receive from each ruble advanced to the company.

Return on equity formula for calculating the balance sheet

The calculation is the ratio of net profit for the year to the enterprise's own funds for the same period. Data is taken from the “Profit and Loss Statement” and “Balance Sheet”. If you need to find the coefficient as a percentage, then the result is multiplied by 100.

Formula for return on equity based on net profit:

RSK = PE / SK (average) * 100, where

• RSC – return on equity,
• PE – net profit for the billing period,
• SK (average) – the average amount of investment for the same billing period.

Example of formula calculation. Company A has its own funds in the amount of 100 million rubles. Net profit for the reporting year amounted to 400 million. RSC = 100 million/400 million * 100 = 25%.

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

Example. Firms “A” and “B” have the same equity capital, 100 million rubles. The net profit of enterprise “A” is 400 million, and that of enterprise “B” is 650 million. Let's substitute the data into the formula. We find that the profitability ratio of company “A” is 25%, “B” is 15%. The profitability of the first organization was higher at the expense of its own funds, and not at the expense of revenue (net profit). After all, both enterprises entered into business with the same amount of capital investment. But company B did a better job.

Accurate calculation of profitability

To obtain 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.

The calculation is:

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

• SKng – equity capital at the beginning of the year;
• SKkg – the amount of own funds at the end of the reporting year.

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

What numbers are taken from accounting forms?

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

• 2110 “Revenue”;
• 2320 “Interest receivable”;
• 2310 “Income from participation in other organizations”;
• 2340 “Other income”.

To calculate the amount of equity capital (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 “Income for future periods” (data at the beginning plus data at the end of the reporting period).

Calculation of the standard level of profitability

How to understand that it makes sense to invest in a business? Return on equity shows the standard value. One way is to compare the profitability with other options for advancing money (investing in shares of other companies, buying bonds, etc.). The standard level of return is considered to be interest on deposits in banks. This is a certain minimum, a certain limit for determining the return of a business.

Formula for calculating the minimum profitability ratio:

RSK (n) = Std * (1 – Stnp), where

• RSC (n) – standard level of return on equity (relative value);
• Std – deposit rate ( average for the reporting year);
• Stnp – income tax rate (for the reporting period).

If, as a result of calculations, the return on invested own financial resources turns out to be less than RSC (n) or receives a negative value, then it is not profitable for investors to invest in this company. The final decision is made after analyzing profitability over the past few years.

Profitability is a fairly broad concept that can be applied to different components of any company. You can choose synonyms for it such as efficiency, payback or profitability. It can be applied to assets, capital, production, sales, etc. When calculating any of the performance indicators, the same questions are answered: “are resources being used correctly” and “are there benefits.” The same is true for return on equity (the formula used to calculate it is presented below).

Own capital and investors

Equity refers to the financial resources of the company owner, shareholders and investors. The last group is represented by people or companies that invest their funds in business development in third-party companies. It is important for them to know that their investments are profitable. Further cooperation and development of the company in the market depends on this.

Every company needs financial investments - both internal and external. And the situation is much more favorable when these funds are represented not by bank loans, but by investments from sponsors or owners.

How to understand whether it is worth continuing to invest in a particular company? Very simple. You just need to calculate your net worth. The formula is easy to use and transparent. It can be used for any organization based on balance sheet data.

Calculation of the indicator

What does the formula look like? Return on equity is calculated using the following calculation:

Rsk = PE/SK, where:

Rsk - return on capital.

SK is the company's own capital.

PE is the net profit of the enterprise.

The return on equity is most often calculated over a year. And all the necessary values ​​are taken for the same period. The obtained result gives a complete picture of the enterprise’s activities and the profitability of equity capital.

Do not forget that not only but also borrowed funds can be invested in any company. In this case, return on equity, the calculation formula for which is given above, gives an objective assessment of the profit from each unit Money, invested by investors.

If necessary, the profitability formula can be changed to obtain the result as a percentage. In this case, it is enough to multiply the resulting quotient by 100.

If you need to calculate an indicator for another period (for example, less than a year), then another formula is needed. Return on equity in such cases is calculated as follows:

Rsk = PE * (365 / Period in days) / ((SKnp + SKkp) / 2), where

SKnp and SKkp are equity capital at the beginning and end of the period, respectively.

Everything is relative

In order for investors or owners to fully assess the profitability of their investments, it is necessary to compare it with a similar indicator that could be obtained by financing another company. If the effectiveness of the proposed investment is higher than the actual one, then it may be worth switching to other companies that require investment.

The formula developed to calculate the standard value can also be used. Return on equity in this case is calculated using the average rate on bank deposits for the period (CD) and on income tax (SNP):

Krnk = Sd * (1-Snp).

When comparing the two indicators, it will immediately become clear how well the company is doing. But for a complete picture, it is necessary to analyze the efficiency of equity capital over several years so that temporary or permanent decline in profitability can be more accurately determined.

It is also necessary to take into account the degree of development of the company. If at the end of the period some innovations were introduced (for example, replacing equipment with more modern ones), then it is quite natural for there to be a slight decrease in profits. But in this case, profitability will certainly return to its previous level - and, possibly, become higher - in the shortest possible time.

About the norms

Each indicator has its own standard, including the efficiency of equity capital. If you focus on (for example, England and the USA), then the profitability should be in the range of 10-12%. For developing countries whose economies are subject to inflation, this percentage should be much higher.

You need to know that you should not always rely on return on equity, the formula for calculating which is presented at the beginning. The value may be overestimated, since the indicator is influenced by other financial levers. One of them is the value For such cases, it exists. It allows you to more accurately calculate profitability and the influence of certain factors on it.

Eventually

Every owner and investor should be aware of the formula discussed. Return on equity is good helper in any direction of activity. It is the calculations that will tell you when and where to invest your funds, as well as the right moment to withdraw them. This is very important information in the world of investment.

For owners and managers, this indicator gives a clear picture of the direction of activity. The results obtained can suggest exactly how to continue running the business: along the same path or change it radically. And making such decisions will ensure increased profits and greater stability in the market.