Definition of Return on Stockholders’ Equity
The financial ratio return on stockholders’ equity (or return on equity) is calculated by dividing a corporation’s net income after income taxes by the average amount of stockholders’ equity during the period of the net income.
Example of Return on Stockholders’ Equity
Assume that a corporation without preferred stock had net income after tax of $100,000 for its most recent year. The corporation’s stockholders? equity was $950,000 at the beginning of the year and was $1,050,000 at the end of the year and the increase occurred at a uniform rate throughout the year. The corporation’s return on stockholders? equity was 10% ($100,000 divided by the average stockholders? equity of $1,000,000).
