How to calculate return on equity

The return on equity is the ratio of net profit to equity capital. This indicator shows how many rubles of profit per ruble of the equity. It shows the return on investment of the shareholders of the company, in terms of accounting profits. This is the most important indicator for the owners of the company, as characterizes the size of their income, in particular the amount of the dividend.

Return on invested (total) capital is the ratio of profit margin before taxes and interest to the amount borrowed and own capital. This indicator characterizes profitability of the firm for investment as own-account and at the expense of borrowed funds.

Return on investment reflects the efficiency of funds which were invested in the development of this organization outside participants. It is defined as profit before tax divided by the value of the balance sheet total minus current liabilities.

The profitability of fixed capital is the ratio of the balance sheet profit to the average cost of capital. In a similar way to calculate profitability of working capital. Return on assets will be calculated as the sum of these coefficients or the ratio of retained earnings to the aggregate of the company's assets.

If you compare the return on assets and return on equity, we will see the extent of use by firm financial leverage (borrowings) with the aim of increasing profitability. The return of own capital increases if the proportion of borrowed funds in the total sources of assets increases.

The difference between the profitability of own capital profitability of the invested capital is called financial leverage effect. It represents the increment of profitability of own capital obtained through the use of borrowed funds.