Return on equity measures how much profit a company is making as a percentage of the equity invested in the company. For example, a company making a $50,000 profit with only $200,000 in equity has a much higher return on equity than a company making that same profit but with $5 million of equity. Over time, the return on equity is likely to change. You can measure the change in return on equity as just the simple difference between the two numbers or as a percentage change. Using the percentage change allows you to better compare the increase or decrease across multiple companies. For example, if return on equity increased by 2 percentage points, that's not as big a deal for a company that already has a 20 percent return on equity as it is for a company that was previously returning 1 percent.
Subtract the initial return on equity from the current return on equity. For example, say you want to compare your business's return on equity from five years ago to the return on equity this year. If the return on equity was 2.3 percent five years ago and 13.5 percent now, subtract 2.3 from 13.5 to find the difference in return on equity has increased by 12.2 percentage points.
Divide the difference by the initial return on equity. For this example, divide 12.2 percent by 2.3 percent to get 5.30.
Multiply the result by 100 to find the change in return on equity as a percentage. In this example, multiply 5.30 by 100 to get a change in return on equity of 530 percent. This means that your current return on equity is 5.3 times as large as it was five years ago.
- Zedcor Wholly Owned/PhotoObjects.net/Getty Images
- What Are the Benefits of Return on Equity?
- How to Calculate an Equity Multiple
- How to Calculate Unlevered Cost of Equity
- Differences in an Annualized Return and an Absolute Return
- Return on Asset Vs. Return on Equity
- Unlevered Return on Equity Vs. Levered Return on Equity
- Annualizing a Multi-year Return
- Do Common Dividends Have an Influence on the Return of Equity?