Opening equity, closing equity, or the average?

The average of opening and closing, whenever equity moved much during the year. Profit is earned across twelve months while closing equity already contains all of it, so dividing by the closing figure understates the return, and dividing by the opening figure overstates it. The gap is trivial for a stable company and large for one that raised capital, paid a special dividend or bought back shares — exactly the cases where the ratio is being examined most closely.

How does this differ from return on assets?

Return on assets divides the same profit by everything the company uses rather than by the owners' share of it, so it answers how well the assets are being run and is unaffected by who paid for them. The relationship is exact: return on equity equals return on assets times the equity multiplier. Reporting both, or reporting one with the multiplier beside it, tells the whole story — the first number is management, the second is financing, and only the pair together explains a good year.

Twenty Per Cent Return on Equity, Half of It Borrowed

Published 9/30/2026 · 3 min read · Business tools

Camille Laurent — Finance writer at OneKitly

Tax · Personal finance

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In short

Return on equity is net income divided by shareholders' equity: 50,000 ÷ 250,000 = 20 %. The number is only interesting once it is broken into the three things that produce it. If revenue is 500,000, the net margin is 10 %; with total assets of 500,000, asset turnover is 1.0; and with equity of 250,000 against those assets, the equity multiplier is 2.0. Multiply 10 % × 1.0 × 2.0 and you are back at 20 %. The same company financed entirely by its owners — equity of 500,000, multiplier 1.0 — earns exactly 10 %. Half of that headline return is the leverage, and the leverage does not know which direction the year is going. Comparing two firms on ROE without comparing their multipliers is comparing how much they borrowed and calling it performance.

Net income of 50,000 on equity of 250,000 is an ROE of 20 %. The same profit on 500,000 of equity is 10 % — the extra ten points came from the debt, not from the business.

A shrinking denominator flatters the ratio

Equity falls when a company buys back its own shares, pays a large dividend, or books a loss, and each of those raises return on equity without a single additional euro of profit. A firm that has bought back enough stock can show a spectacular figure on a small remaining equity base, and one whose accumulated losses have eaten most of its capital can post the best ratio in its sector on the way to insolvency. Read the numerator and the denominator's history together, and treat any sharp improvement in this ratio as a question about which of the two moved.

Leverage works in both directions

The multiplier of 2.0 that turned 10 % into 20 % applies to losses just as faithfully. Halve the operating result of the leveraged firm and its interest bill does not halve with it, so what reaches the owners falls by more than half; the unleveraged firm's return simply follows the operating result down. That asymmetry is why lenders and shareholders read the same ratio differently — a rising multiplier is better news for the second group than the first, right up to the year it isn't. The useful habit is to look at what the ratio would be at the multiplier of a debt-free version of the same business, and treat the gap as the price of the borrowing.

Same profit, same assets, two financings
Equity	Multiplier	ROE
250,000	2.0	20 %
500,000	1.0	10 %

Worked with our own calculator

Return on equity (ROE) calculator

Given

Net income: $50,000.00
Shareholder equity: $250,000.00

Result

Return on equity: 20%

These figures are produced by the calculator below, not typed in by hand — they are recomputed whenever the tool changes.

Run it on your own figures →

Frequently asked questions

Opening equity, closing equity, or the average?: The average of opening and closing, whenever equity moved much during the year. Profit is earned across twelve months while closing equity already contains all of it, so dividing by the closing figure understates the return, and dividing by the opening figure overstates it. The gap is trivial for a stable company and large for one that raised capital, paid a special dividend or bought back shares — exactly the cases where the ratio is being examined most closely.
How does this differ from return on assets?: Return on assets divides the same profit by everything the company uses rather than by the owners' share of it, so it answers how well the assets are being run and is unaffected by who paid for them. The relationship is exact: return on equity equals return on assets times the equity multiplier. Reporting both, or reporting one with the multiplier beside it, tells the whole story — the first number is management, the second is financing, and only the pair together explains a good year.

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Sources

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