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Red Hat Inc (NYSE:RHT)
Return on Equity
9.92% (As of May. 2014)

Return on equity is calculated as net income divided by its total shareholder equity. Red Hat Inc's annualized net income for the quarter that ended in May. 2014 was $151 Mil. Red Hat Inc's total shareholder equity for the quarter that ended in May. 2014 was $1,525 Mil. Therefore, Red Hat Inc's annualized return on equity (ROE) for the quarter that ended in May. 2014 was 9.92%.

RHT' s 10-Year Return on Equity Range
Min: -42.81   Max: 16.71
Current: 11.49

-42.81
16.71

During the past 13 years, Red Hat Inc's highest Return on Equity (ROE) was 16.71%. The lowest was -42.81%. And the median was 7.57%.

RHT's Return on Equityis ranked higher than
80% of the 1559 Companies
in the Global Software - Application industry.

( Industry Median: 6.80 vs. RHT: 11.49 )

Definition

Red Hat Inc's annualized Return on Equity (ROE) for the fiscal year that ended in Feb. 2014 is calculated as

Return on Equity (ROE)=Net Income (A: Feb. 2014 )/Total Shareholder Equity (A: Feb. 2014 )
=178.292/1551.165
=11.49 %

Red Hat Inc's annualized Return on Equity (ROE) for the quarter that ended in May. 2014 is calculated as

Return on Equity (ROE)=Net Income (Q: May. 2014 )/Total Shareholder Equity (Q: May. 2014 )
=150.98/1524.803
=9.90 %

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

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 Net Income data used here is four times the quarterly (May. 2014) net income data. Return on equity is displayed in the 10-year financial page.


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 company’s Return on Equity (ROE) can be illustrated with the Du Pont Formula:

Return on Equity (ROE)(Q: May. 2014 )
=Net Income/Total Shareholder Equity
=150.98/1524.803
=(Net Income / Revenue)*(Revenue / Total Assets)*(Total Assets / Total Shareholder Equity)
=(150.98 / 423.754)*(423.754 / 3070.01)*(3070.01 / 1524.803)
=Net Profit Margin*Asset Turnover*Leverage Ratio
=0.3563*0.138*2.0134
=Return on Assets*Leverage Ratio
=0.0492*2.0134
=9.90 %

Note: The Net Income data used here is four times the quarterly (May. 2014) net income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

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.


Be Aware

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 company’s 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 company’s 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


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Red Hat Inc Annual Data

Feb05Feb06Feb07Feb08Feb09Feb10Feb11Feb12Feb13Feb14
ROE 12.5816.717.298.067.127.858.3110.489.8811.49

Red Hat Inc Quarterly Data

Feb12May12Aug12Nov12Feb13May13Aug13Nov13Feb14May14
ROE 10.2810.609.449.4011.3211.6011.3214.1611.649.92
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