Definition
Return on Equity is calculated as follows:
Return on Equity (ROE) = Net Income / Total Shareholder Equity
In the calculation of annual return on equity, the net income of the last fiscal year issued. The Total Shareholder Equity is from the end of year data. Strictly speaking, average Total Shareholder Equity should be used. In calculating the quarterly data, the result is multiplied by 4 to get annualized the rate. Return on equity is displayed in the 10-year financial page.
Formula
Return on Equity (ROE) =
Net Income /
Total Shareholder EquityPenn National Gaming ROE Calculation
* All numbers are in millions except for per share dataPenn National Gaming Annual Data
| Dec03 | Dec04 | Dec05 | Dec06 | Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 |
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| ROE |  | | | | | | | | | |
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Penn National Gaming Quarterly Data
| Dec10 | Mar11 | Jun11 | Sep11 | Dec11 | Mar12 | Jun12 | Sep12 | Dec12 | Mar13 |
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| ROE | | | | | | | | | | |
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Explanation
Return on Equity (ROE) measures the rate of return on the ownership interest (shareholder's equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable.
The factors that affect a companys Return on Equity (ROE) can be illustrated with the Du Pont Formula:
Return on Equity (ROE)
= Net Income / Total Shareholder Equity
= (Net Income} / Sales) x (Sales / Total Assets) x (Total Assets /Total Shareholder Equity)
= Net Profit Margin x Asset Turnover x Leverage Ratio
= Return on Assets x Leverage Ratio
With this breakdown, it is clear that if a company grows its Net Profit Margin, its Asset Turnover, or its Leverage, it can grow its return on equity.
Beaware
Because a company can increase its return on equity by having more financial leverage, it is important to watch the leverage ratio when investing in high ROE companies. Like ROA, ROE is calculated with only 12 months data. Fluctuations in companys earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective. ROA can be affected by events such as stock buyback or issuance, as well as by goodwill, the companys tax rate and its interest payment. Return on assets may not reflect the true earning power of the assets. A more accurate measurement is Return on Capital (ROC).
Asset light businesses require very few assets to generate very high earnings. Their ROEs can be extremely high.
Related Terms
Return on Assets,
Return on Capital,
Return on Capital - Joel Greenblatt,
Total Equity* All numbers are in millions except for per share dataPenn National Gaming Annual Data
| Dec03 | Dec04 | Dec05 | Dec06 | Dec07 | Dec08 | Dec09 | Dec10 | Dec11 | Dec12 |
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| ROE | | | | | | | | | | |
|---|
Penn National Gaming Quarterly Data
| Dec10 | Mar11 | Jun11 | Sep11 | Dec11 | Mar12 | Jun12 | Sep12 | Dec12 | Mar13 |
|---|
| ROE | | | | | | | | | | |
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