{"id":119186,"date":"2025-09-09T08:11:39","date_gmt":"2025-09-09T08:11:39","guid":{"rendered":"https:\/\/arielle.com.au\/?p=119186"},"modified":"2025-12-01T21:00:26","modified_gmt":"2025-12-01T21:00:26","slug":"return-on-equity","status":"publish","type":"post","link":"https:\/\/arielle.com.au\/return-on-equity\/","title":{"rendered":"How To Calculate And Improve Your Return On Equity"},"content":{"rendered":"<span class=\"span-reading-time rt-reading-time\" style=\"display: block;\"><span class=\"rt-label rt-prefix\">Reading Time: <\/span> <span class=\"rt-time\"> 5<\/span> <span class=\"rt-label rt-postfix\">minutes<\/span><\/span>\n<p>Are you running a tight ship &#8211; or just burning resources? ROE reveals how much profit your business squeezes out of every dollar available (e.g., retained earnings, shareholder capital, equipment and property). <\/p>\n\n\n\n<p>It&#8217;s expressed as a percentage (e.g., 15%). The higher it is, the more attractive your business is to investors and buyers.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What Is Return On Equity?<\/strong><\/h2>\n\n\n\n<p>Return on equity (ROE) is a measure of how much profit you make from every dollar of equity in your business.<\/p>\n\n\n\n<p>To find your ROE ratio, divide your total profits by your equity in the business. <\/p>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\">Important!<\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">Equity is the value of your assets (e.g., cash, inventory, investments and physical assets) <a href=\"https:\/\/arielle.com.au\/best-accounting-software-for-small-business\/\">once you\u2019ve accounted for liabilities<\/a> such as loan repayments, bills, wages and taxes owed.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<p>Here\u2019s the ROE formula to use:<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Return on equity = <\/strong>Net Income \/ Owner\u2019s equity or Shareholder\u2019s equity.<\/li><li><strong>Net income = <\/strong>Total income &#8211; Total expenses.<\/li><li><strong>Equity = <\/strong>Total assets &#8211; Total liabilities.<\/li><\/ul><\/div><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"791\" src=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-1024x791.jpg\" alt=\"\" class=\"wp-image-119214\" srcset=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-1024x791.jpg 1024w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-300x232.jpg 300w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-768x593.jpg 768w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity.jpg 1500w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Equity is essentially the true worth of your business, once you have subtracted all your obligations.<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>If you\u2019re a sole operator or partnership<\/strong>, you (and your partner) will personally hold all the net assets\/equity. This is what\u2019s known as owner\u2019s equity.<\/li><li><strong>If you\u2019re a company that issues shares,<\/strong> multiple people may have an ownership stake. Shareholders\u2019 equity refers to the value of the company held by shareholders.<\/li><\/ul><\/div><\/div>\n\n\n\n<p>Underpinning the ROE measurement are two other metrics that can be calculated separately: Return on Assets (ROA), and Financial leverage.<\/p>\n\n\n\n<p>ROE can also be derived by multiplying ROA by Financial leverage.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"791\" src=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-roe-1024x791.jpg\" alt=\"\" class=\"wp-image-119216\" srcset=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-roe-1024x791.jpg 1024w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-roe-300x232.jpg 300w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-roe-768x593.jpg 768w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/return-on-equity-roe.jpg 1500w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>ROA<\/strong> = Net income \/ Assets. This expresses profit generated as a percentage per dollar of assets owned.<\/li><li><strong>Financial leverage<\/strong> = Assets \/ Equity. This gives you a measure of how much your business depends on debt relative to equity or share capital.<\/li><li><strong>Return on equity = ROA x Financial Leverage<\/strong><\/li><\/ul><\/div><\/div>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Why Is ROE An Important Metric?<\/strong><\/h2>\n\n\n\n<p>ROE is irrelevant for most mom and pop business owners.<\/p>\n\n\n\n<p>For them, the business (e.g., local chicken shop) is a full-time job that pays them a wage. They never grow it into a separate, sellable entity. In that sense, it isn\u2019t really an asset. <\/p>\n\n\n\n<p>Eventually, it\u2019s either passed down to children or wound up.<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span>But if you plan to <em>sell<\/em> your business, ROE becomes critical. <\/span><\/div><\/div>\n\n\n\n<p>The sale itself often represents the biggest financial outcome &#8211; far more substantial than the wages you drew along the way.<\/p>\n\n\n\n<p>The Sher family, for example, sold Chargrill Charlies, a chain of chicken shops, to a PE firm in 2023. The amount was undisclosed, but likely exceeded $50 million.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"791\" src=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/calculating-ROE-1024x791.jpg\" alt=\"\" class=\"wp-image-119221\" srcset=\"https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/calculating-ROE-1024x791.jpg 1024w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/calculating-ROE-300x232.jpg 300w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/calculating-ROE-768x593.jpg 768w, https:\/\/arielle.com.au\/wp-content\/uploads\/2025\/09\/calculating-ROE.jpg 1050w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p><em>Above: ROE would have played a key part in Chargrill Charile&#8217;s valuation.<\/em><\/p>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\">Important!<\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">And any buyer &#8211; whether private equity, institutional, or individual &#8211; will want to see your ROE.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<p>Why?<\/p>\n\n\n\n<p>Because it allows investors to compare companies within the same industry. Specifically, how effectively a company is leveraging investors\u2019 money to grow its profits.<\/p>\n\n\n\n<p>That\u2019s a big deal &#8211; because it ensures dividends get paid out.<\/p>\n\n\n\n<p>It also allows for reinvestment in the business to keep it on a successful trajectory (and its valuation or share price rising).<\/p>\n\n\n\n<p><strong>(Related: <\/strong><a href=\"https:\/\/arielle.com.au\/liquidity-ratio\/\"><strong>Liquidity Ratios Guide For SMBs<\/strong><\/a><strong>)<\/strong>.<\/p>\n\n\n\n<p>If you\u2019re consistently growing your ROE, potential investors, buyers or shareholders will view you as a commercially astute SMB operator who is delivering a lot of shareholder value.<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span>Keeping track of ROE also helps you build a clearer picture of profitability.<\/span><\/div><\/div>\n\n\n\n<p>If you\u2019re holding onto more of what you own but still growing your profitability at a pace, it\u2019s a positive sign that you\u2019re using equity wisely and running an efficient operation.<\/p>\n\n\n\n<p>A good ROE indicates that:<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Your<\/strong> branding, pricing, management and processes are more dialled-in, meaning you need to spend less of your equity to keep profits on the rise.<\/li><li><strong>You\u2019re<\/strong> making smart investments in things like physical infrastructure, research and development, or new ventures to boost your bottom line.<\/li><\/ul><\/div><\/div>\n\n\n\n<p>You\u2019ll be better prepared to attract investment or sell your business for a decent price if you increase your ROE over time.&nbsp;<\/p>\n\n\n\n<p><strong>(Related: <a href=\"https:\/\/arielle.com.au\/best-crypto-exchange-australia\/\">Best Crypto Exchanges In Australia<\/a>).<\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Return On Equity Calculation Example.<\/strong><\/h2>\n\n\n\n<p>Let\u2019s take the example of a small food manufacturing and distribution business that owns a fully equipped property. <\/p>\n\n\n\n<p>It owns a range of equipment, including a commercial kitchen, industrial appliances and cool rooms.<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Net income:<\/strong> After subtracting all of its materials, production overheads and operating expenses, the company\u2019s net profit annually is $400k.<\/li><li><strong>Net value:<\/strong> Its assets are worth $2.5 million. Minus its liabilities (loan repayments, wages, tax), that puts the business\u2019 equity at $1.6 million.<\/li><li><strong>ROE:<\/strong>\u00a0Using the ROE formula, we divide $400,000 in profit by $1.6 million in equity to determine the company has a return on equity of 25%.<\/li><\/ul><\/div><\/div>\n\n\n\n<p><strong>(Related: <\/strong><a href=\"https:\/\/arielle.com.au\/guide-to-capital-expenditure-capex\/\"><strong>The Ultimate Guide to Capex For SMBs<\/strong><\/a><strong>.)<\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What Is A Good ROE Ratio?<\/strong><\/h2>\n\n\n\n<p>A ROE of around 20% can be considered good, but it depends a great deal on what kind of business you\u2019re in and who you\u2019re comparing yourself to.<\/p>\n\n\n\n<p>Business Queensland <a href=\"https:\/\/www.business.qld.gov.au\/running-business\/finance\/essentials\/break-even-profit\">suggests<\/a>:<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span> \u201cYour return on equity should be at least equal to long-term bank interest rates (for borrowed money) as well as an additional return based on the level of risk.\u201d<\/span><\/div><\/div>\n\n\n\n<div class=\"wp-block-create-block-tip-block tip-wrapper\"><div class=\"row\"><div class=\"col-md-12\"><div class=\"card-wrapper\"><div class=\"card-title\"><div class=\"icon\"><svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"20\" height=\"20\" viewBox=\"0 0 20 20\" fill=\"none\"><path fill-rule=\"evenodd\" clip-rule=\"evenodd\" d=\"M7.5 14.33a5 5 0 1 1 5 0v4.17h-5v-4.17Zm4.25-1.3-.75.44V17H9v-3.53l-.75-.44a3.5 3.5 0 1 1 3.5 0Z\" fill=\"#656E83\"><\/path><path d=\"M9.25 1v2h1.5V1h-1.5ZM5.53 4.47l-1.5-1.5-1.06 1.06 1.5 1.5 1.06-1.06ZM15.53 5.53l1.5-1.5-1.06-1.06-1.5 1.5 1.06 1.06ZM1 10.75h2v-1.5H1v1.5ZM17 10.75h2v-1.5h-2v1.5Z\" fill=\"#656E83\"><\/path><\/svg><\/div><h3 placeholder=\"Tip Title Goes Here\"><strong>Important!<\/strong><\/h3><\/div><div class=\"card-content\"><p placeholder=\"Tip Content Goes Here\">With current home loan interest rates between 5%-8%, you probably don\u2019t want an ROE below 10%.<\/p><\/div><\/div><\/div><\/div><\/div>\n\n\n\n<p>Of course, success in some industries is only possible through significant investment in physical plant or equipment, and high operating costs. <\/p>\n\n\n\n<p>Both of which will dampen ROE, even if the company is doing well.<\/p>\n\n\n\n<p>A higher ROE is desirable. But as with most financial metrics, an exceptionally high or variable ROE ratio could be suspect.<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>High levels of debt<\/strong> can inflate an ROE.<\/li><li><strong>One-off spikes in income<\/strong> can skew ROE temporarily.<\/li><\/ul><\/div><\/div>\n\n\n\n<p>If we use the same food manufacturer from our earlier example, but we add $500,000 extra in liabilities through multiple borrowings, the company\u2019s equity shrinks to $1.1 million. <\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span>The revised ROE ($400k in profit \/ $1.1m) is 36.36%.<\/span><\/div><\/div>\n\n\n\n<p>That\u2019s considerably higher than 25%. <\/p>\n\n\n\n<p>But taking on so much debt adds risk \u2014 if cashflow dries up, highly leveraged companies can fall behind on repayments and things can quickly spiral.<\/p>\n\n\n\n<p><strong>(Related: <a href=\"https:\/\/arielle.com.au\/payroll-processing\/\">Ultimate Guide To Payroll Processing<\/a>).<\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How To (Safely) Improve Your Return On Equity.<\/strong><\/h2>\n\n\n\n<p>So, if your ROE is below 10%, what can you do to lift it back into respectable territory? <\/p>\n\n\n\n<p>The two major levers to pull are raising profits or reducing equity.<\/p>\n\n\n\n<p>So, for example, a company with shareholders could quickly improve its ROE through a share buyback that lowers shareholder equity \u2014 but that doesn\u2019t reflect a higher performing business.<\/p>\n\n\n\n<p>Going into more debt will also decrease equity, and has the potential to fuel growth that drives profitability. <\/p>\n\n\n\n<p>You\u2019ll need to carefully do your sums to make sure the cost of servicing debt doesn\u2019t eat into your returns too much.<\/p>\n\n\n\n<div class=\"indent-wrapper\"><div class=\"indented-text\"><span><em>Short-term fixes to your ROE metric aren\u2019t helpful if they reduce your business\u2019 stability or ability to keep your customers satisfied.<\/em><\/span><\/div><\/div>\n\n\n\n<p>Some strategies you should look into:<\/p>\n\n\n\n<div class=\"arrow-wrapper\"><div class=\"arrow-list\"><ul><li><strong>Get serious <\/strong>about <a href=\"https:\/\/arielle.com.au\/calculate-and-improve-net-profit-margin\/\">lifting your profit margin<\/a>, without a commensurate lift in expenses. Simple examples include price hikes or sourcing less expensive products.<\/li><li><strong>Improve how<\/strong> you manage assets or stock. Reconsider your need for expensive equipment that rarely gets used, or holding excessive amounts of slow-moving products.<\/li><li><strong>Reduce costs<\/strong> without impacting your service\/product quality by reducing wasteful spending and\/or upgrading your technology, processes or people capabilities.<\/li><\/ul><\/div><\/div>\n\n\n\n<p>Ultimately, improving your ROE while enabling sustainable, long-term and low-risk growth requires honing your competitive advantages and running a cost-efficient operation.<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p>Jody<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p><span class=\"span-reading-time rt-reading-time\" style=\"display: block;\"><span class=\"rt-label rt-prefix\">Reading Time: <\/span> <span class=\"rt-time\"> 5<\/span> <span class=\"rt-label rt-postfix\">minutes<\/span><\/span>Are you running a tight ship &#8211; or just burning resources? ROE reveals how much profit your business squeezes out<\/p>\n","protected":false},"author":14,"featured_media":119202,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_uag_custom_page_level_css":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[289,257],"tags":[],"class_list":["post-119186","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-software","category-business"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.0 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How To Calculate And Improve Your Return On Equity<\/title>\n<meta name=\"description\" content=\"Return on equity (ROE) is a measure of a company&#039;s financial performance. 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