Help - Calculation of ROE, ROA

[Stockowner]

I am not very good at maths, it is only that I have been starting to try to learn basic (!) math seriously, so some formulas may be a bit confusing for now.

I am looking into a company, and when I clicked on "Fundamentals" and "Return on equity", the following showed up:

"This ratio is calculated as follows: (Net Income before Preferred Dividends - Preferred Dividend Requirement) / Last Year's Common Equity * 100."

"* 100"? That's "times 100"?

Isn't Return on Equity simply net income divided by Shareholder's Equity?

And Return on assets, the company says:

"This value is calculated as follows: (Net Income before Preferred Dividends + ((Interest Expense on Debt-Interest Capitalized) * (1-Tax Rate))) / Last Year's Total Assets * 100. For banks, the calculation is: (Net Income before Preferred Dividends + ((Interest Expense on Debt-Interest Capitalized) * (1-Tax Rate))) / (Last Year's Total Assets - Last Year's Customer Liabilities on Acceptances) * 100. For Insurance Companies, the calculation is: (Net Income before Preferred Dividends + ((Interest Expense on Debt-Interest Capitalized) *(1-Tax Rate))) + Policyholders' Surplus) / Last Year's Total Assets * 100. For REITs and Other Financial Companies, the calculation is: (Net Income before Preferred Dividends + ((Interest Expense on Debt-Interest Capitalized) * (1-Tax Rate))) / (Last Year's Total Assets - Last Year's Custody Securities) * 100."


What is all this "* 100", and isn't Return on Assets simply annual earnings divided by its total assets?

I am only a toddler as an investor, and as a toddler I may ask stupid questions. :)

I just thought this company's calculations sounded strange.

[Stockowner]

Anyone?

[Gunnski]

It can be. It is a measure of rate of return on ownership interest of common stock holders.

ROE = NET INCOME
Average Stockholder Equity

I like this one better to breakdown ROE:

Net Income/Sales * Sales/Total Assests * Total Assets/Average Stockholders Equity.

You can put this into a spreadsheet very easily. Regarding the 100, all of the data mines pump out differnt numbers & formulaes.

Please do not take this wrong, but you can drive yourself crazy by over handicapping. Find numbers that work and keep it simple. ROE is very useful, but a consulting firm with a nice ROE is difficult to compare to an oil refinery also with a sparkling ROE.

[skylion80]

Hi,

I suggest to keep it simple as well.

First * 100 is to get the percentage. E.g. 0.2 = 20%

Try to understand ROI and ROE first:

ROI = net income / total assets

the total assest equal equity + total liabilities

ROE = net income / equity

The idea behind the ROI is to know the return of the WHOLE capital employed. This means shareholder's capital AND the capital coming from liabilities, which is mostly money lend from the bank.

The ROE gives the return of ONLY the shareholder's capital.

Notice that when a company doesn't have any liabilties, ROE and ROI are equal.

I hope this helps!