How to Calculate Return on Equity

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Return on equity or ROE (Return On Equity) is one of the calculations included in the profitability ratio. ROE is a ratio calculation that shows a company’s ability to generate net income using its own capital and generate net income available to owners or investors. ROE calculation can be used as a benchmark for the company’s financial performance. ROE is very dependent on the size of the company, for example for small companies would have a relatively small capital, so that the resulting ROE is small, and vice versa for large companies.

Return on equity (ROE) is the amount of return from net income to equity and expressed as a percent. ROE is used to measure the ability of a business entity to generate profits with equity invested in shareholders. ROE is expressed as a percentage and calculated by the ROE (Return On Equity) formula comparing net income after tax with the equity that has been invested by the company’s shareholders (Van Horne and Wachowicz, 2005: 225).

This ratio shows the power to generate a return on investment based on the book value of shareholders, and is often used in comparing two or more companies for good investment opportunities and effective cost management. ROE is very attractive to holders and prospective shareholders, and also to management, because the ratio is an important measure or indicator of shareholder value creation, meaning that the higher the ROE ratio, the higher the value of the company, this is certainly an attraction for investors to invest capital in the company.

Factors Affecting the Return on Owner’s Equity (ROE)

After knowing the explanation about ROE, the next explanation are the factors that influence ROE. Basically, there are two factors that influence the level of ROE, namely net income and equity:

a. Net income (net income)

In accordance with the statement in the Indonesian Institute of Accountants (1999: 94): Net income (net income) is often used as a performance measure or as a basis for other measures such as ROE or earnings per share. The elements directly related to the measurement of profit are income or expenses.

b. Equity
Equity (Equity) is the amount of capital that represents a person’s ownership rights over company assets. From this equity is known how much ownership of a person against a company. In financial statements, we can find equity in the Statement of Financial Position (Balance Sheet). Types of equity, namely paid up capital, retained earnings, dividends, and shares.

How to Calculate JKNVCF Equity Returns (ROE)
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The following is the formula for calculating ROE along with the case and how to calculate it, which in Indonesian is often called the Equity Returns Ratio.

The ROE (Return On Equity) formula is as follows:

Return On Equity = net income: equity

Problems example:

In 2017, the average equity of PT Maju Bersama’s shareholders, amounted to Rp625,000,000 with a net profit of Rp1,000,000,000. Then the return on equity from the above calculation is.

Rp1,000,000,000: Rp.625,000,000 = 1.6 or 160% ROE

Information:

The result of ROE calculation approaching 1 shows the more effective and efficient use of company equity to generate revenue, and vice versa if ROE approaches 0 means the company is unable to manage the available capital efficiently to generate revenue.

How to use ROE information
Compare company ROE for the past 5-10 years. This will provide information on company growth more significantly. Although the increase in ROE in the range of 5-10 years does not guarantee the company will continue to grow at that speed. But at least from this information we will find a graph of the average acquisition of the company.
Compare ROE figures from companies of the same size and industry. Perhaps, the ROE number is low because the industry they work with has a low profit margin.
Properties with high growth rates tend to have high ROE because they are able to generate additional income without the need for external parties.
Because of the importance of calculating return on equity (ROE) for companies to attract investors as well as a form of accountability for shareholders, it is better for companies to always prepare and share information on these equity returns regularly and well to those who need them.

This ROE illustrates well to measure the extent to which a company in using every dollar they get.

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