# What Can Affect a Return on Common Stockholder's Equity? i Thinkstock Images/Comstock/Getty Images

Return on common stockholder's equity, often abbreviated as ROE, is perhaps the single most important factor influencing the value of your investment portfolio. In simple terms, this ratio tells you how profitably the firm's management is using the money that you and other shareholders have entrusted to it. Various factors influence this all-important figure.

## Definition

Return on equity equals Net Profit divided by Shareholder Equity. Assume, for instance, that you invest \$400,000 in a laundromat, which yields net profits of \$40,000 per year. Your ROE is \$40,000 / \$400,00 or 0.1. Multiplying this result by 100 allows you to convert the figure into a percentage. In this case, 0.1 x 100 results in 10 percent ROE. In other words, you gain 10 cents for each dollar you invest into this laundromat. This figure is the most important parameter to look at when comparing investment alternatives. Provided that various investments involve similar risk levels, invest in the opportunity with the highest ROE.

## Gross Margin

Gross margin defines how profitable your sales are and is a major determinant of your ROE. The formula for gross margin is gross profit divided by net sales multiplied by 100. Gross profit equals net sales minus cost of goods sold. In the laundry example, assume that direct expenses, such as water, electricity and depreciation on the washing machines was \$120,000 for the year and your total sales proceeds were \$200,000. Your gross profit is therefore \$200,000 - \$120,000 = \$80,000. Gross margin equals \$80,000 / \$200,000 x 100 = 40 percent. On average, you are taking in 40 cents for each dollar in sales. This 40 cent figure, however, does not include indirect expenses, which also affect ROE.