# How to Calculate Return on Equity

The equity ratio remains a good way to deduce profitability. Here is how you can calculate it for yourself.

Arjun Kulkarni

Explaining the Equity Ratio

Like I mentioned before, it is a profitability ratio. What does that mean? Now by simply looking at the profit figure of the company in isolation, you will not be able to decide whether it is a good profit or not. Why? Because the profit of a company must be commensurate with the amount of capital invested.

*needs*to be substantially more than a company with lower capital, so that the shareholders get adequate return on investment. Thus, we can see that comparing profit with the capital invested by the company, will give a better understanding of how a company is really doing, and whether all the shareholders are getting the required return on their investment.

Return on Equity Ratio

Before we learn how to calculate return on equity, we must first see what are the variables we need. To calculate return on equity, we need to first find out two amounts. First is the net profit after tax (NPAT). The NPAT is the amount that the company is left with, after making all the relevant payments towards business expenses. In a way it is the distributable profit of the company. It is quite obvious that we choose to take this number to calculate return on equity, after all, the profits will be distributed out of this amount.

*equity*, so equity capital is the only form of capital which will be considered for the purpose of this formula. Equity capital is arrived at after deduction of the total liabilities of the company from the total assets.

*owned*capital of the company, unlike the debt capital, which is a liability. Finding these values will enable you to calculate your debt to equity ratio.

**The formula for return on equity is:**

Shareholder Equity

__Net Profit after Tax__* 100Shareholder Equity