What Is the Return on Net Worth Formula
Return on net worth, often called return on equity (ROE), measures how efficiently a company generates profit from shareholders' equity. The basic formula is Net Income divided by Average Shareholders' Equity, expressed as a percentage.
How to Calculate ROE
To calculate ROE, take the company's net income for a period and divide it by the average net worth (equity) over that same period. Net income is found on the income statement, while equity is taken from the balance sheet. A higher percentage generally indicates stronger profitability relative to the capital invested by owners.
Why ROE Matters
ROE helps investors compare how well different companies use equity to generate earnings. It is widely used in fundamental analysis to screen for efficient businesses. For a deeper explanation of the formula and its components, you can visit Investopedia's return on equity guide.
