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Return on equity is calculated as net income divided by its average shareholder equity. Zale Corp's annualized net income for the quarter that ended in Jan. 2014 was $203 Mil. Zale Corp's average shareholder equity for the quarter that ended in Jan. 2014 was $173 Mil. Therefore, Zale Corp's annualized return on equity (ROE) for the quarter that ended in Jan. 2014 was 117.76%.
Zale Corp's annualized Return on Equity (ROE) for the fiscal year that ended in Jul. 2013 is calculated as
|ROE||=||Net Income (A: Jul. 2013 )||/||( (Total Equity (A: Jul. 2012 )||+||Total Equity (A: Jul. 2013 ))||/ 2 )|
|=||10.012||/||( (178.936||+||185.329)||/ 2 )|
Zale Corp's annualized Return on Equity (ROE) for the quarter that ended in Jan. 2014 is calculated as
|ROE||=||Net Income (Q: Jan. 2014 )||/||( (Total Equity (Q: Oct. 2013 )||+||Total Equity (Q: Jan. 2014 ))||/ 2 )|
|=||203.144||/||( (152.955||+||192.073)||/ 2 )|
In the calculation of annual return on equity, the net income of the last fiscal year and the average total shareholder equity over the fiscal year are used. In calculating the quarterly data, the Net Income data used here is four times the quarterly (Jan. 2014) net income data. Return on Equity is displayed in the 15-year financial page.
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)||(Q: Jan. 2014 )|
|=||Net Income||/||Average Shareholder Equity|
|=||(Net Income / Revenue)||*||(Revenue / Average Total Assets)||*||(Average Total Assets / Average Equity)|
|=||(203.144 / 2625.796)||*||(2625.796 / 1300.264)||*||(1300.264 / 172.514)|
|=||Net Profit Margin||*||Asset Turnover||*||Leverage Ratio|
|=||Return on Assets||*||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.
The net income used here is the net income to common shareholders.
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.
Asset light businesses require very few assets to generate very high earnings. Their ROEs can be extremely high.
Zale Corp Annual Data
Zale Corp Quarterly Data