Return on equity: definition

Return on equity (ROE) measures how much profit a company made over a year for each dollar of shareholders' equity on its books.

Formula

ROE = TTM net income / ((opening equity + closing equity) / 2)

TTM net income is the sum of the last four quarters, as described under TTM.
Closing equity is shareholders' equity on the latest balance sheet date.
Opening equity is shareholders' equity on the balance sheet date four quarters earlier, at the start of the same twelve months.

Using the average of the two matches the profit, earned over twelve months, with the equity the company had over the same period.

Debt raises ROE. A company that borrows more needs less equity for the same business, so its ROE rises with no change in how well it operates. Read ROE next to debt-to-equity.
Buybacks raise ROE by shrinking equity.
Negative equity breaks it. If average equity is negative, the formula still produces a number, but it is not a return in any useful sense. Check the equity figures before reading ROE.

TTM net income cannot be built, either equity figure is missing, or average equity is zero.

Related terms

Net incomeThe bottom line: profit or loss attributable to the company's shareholders after every cost, interest and tax.

Shareholders' equityAssets less liabilities, attributable to the company's own shareholders, on the balance sheet date.

TTMThe sum of the last four reported quarters, with the fourth quarter derived from the annual figure.

Debt-to-equityTotal debt divided by shareholders' equity, on the same balance sheet date.