Return on equity, ROE: calculate using average equity

Match owners, period and equity base

Our definition uses annual net profit attributable to the parent company’s shareholders divided by average equity attributable to the same owners. All numbers are fictional. There are no non-controlling interests or preference shares in the model. The year is twelve months and we explicitly average equity at the beginning and end.

A two-point calculation is a simplification: large changes within the year can make a more detailed average describe the equity base differently. Always read how the actual company calculates the measure. Atlas Copco’s published definition uses profit attributable to parent owners and average equity excluding non-controlling interests; our exercise numbers do not describe its operations.

If the table does not fit, scroll it sideways.

Calculate the average before the ratio

Average equity is (300 + 500) / 2 = SEK 400 million. ROE is 60 / 400 × 100 = 15% for the year. Dividing only by ending equity gives 60 / 500 = 12%, while dividing only by starting equity gives 60 / 300 = 20%. Those last two calculations use other equity bases.

Do not simply write 15%; also state the profit period and how the denominator was calculated. A company with the same profit but lower average equity can have higher ROE. This describes the relationship between two reported figures; explaining it may require information about debt, dividends and equity changes.

Shareholder return uses a purchase price

Separately assume someone buys a share for SEK 120, receives a SEK 2 dividend and sells for SEK 114 after the same year. Ignore fees and taxes. The shareholder’s total result is 114 + 2 − 120 = −SEK 4, or −4 / 120 × 100 ≈ −3.33%.

That negative share result can occur while company ROE is 15%. The shareholder uses the price paid as the base, while company ROE uses reported equity. The dividend enters the share example, but ROE is not a dividend percentage. Mixing those denominators creates a comparison that answers neither question correctly.

Interpret a relationship without ranking everything

A very small or negative equity base can make the percentage difficult to interpret. With zero average equity, division is undefined. Do not automatically treat a large number or two negative signs as evidence of a strong company. Check levels, the definition and what changed equity.

Investiq’s company guide helps you begin with the correct company and period. This ROE activity is an independent report calculation and does not imply the app displays the ratio or uses it as purchase advice. Continue with equity ratio for capital structure or total return for shareholder results. These measures answer different questions rather than replacing one another.