What all Shareholders should be aware of ;

Example of Return on Average Equity

Let’s take practical examples.
Big Brothers Company has the following information for you –

Net Income for the year – $45,000

The beginning figure of shareholders’ equity – $135,000

The ending figure of shareholders’ equity – $165,000

Find out the return on average equity (ROAE) of Big Brothers Company.

First, we will calculate the average of shareholders’ equity by simply adding the beginning and the ending figures and dividing the sum by 2.

Here’s the calculation – 

Average shareholders’ equity = ($135,000 + $165,000) / 2 = $150,000.

Net income for the year is $45,000.

Using the ratio of ROAE, we get –

ROAE Formula = Net Income / Average Shareholders’ Equity = $45,000 / $150,000 = 30%.