what is return on average equity roae 
return on average equity roae is a financial ratio that measures the performance of a company based on its average shareholders equity outstanding typically roae refers to a company s performance over a fiscal year so the roae numerator is net income and the denominator is computed as the sum of the equity value at the beginning and end of the year divided by 2 return on average equity differs from the more common return on equity roe which measures net income for the year divided by the amount of shareholder equity at the end of the year which can be subject to stocks sales dividend payments and other share dilutions the basics of return on average equity roae the return on equity roe a determinant of performance is calculated by dividing net income by the ending shareholders equity value in the balance sheet this equity value can include last minute stock sales share buybacks and dividend payments this means that roe may not accurately reflect a business actual return over a period of time the return on average equity roae can give a more accurate depiction of a company s corporate profitability especially if the value of the shareholders equity has changed considerably during a fiscal year roae is an adjusted version of the return on equity roe measure of company profitability in which the denominator shareholders equity is changed to average shareholders equity basically instead of dividing net income by stockholders equity an analyst divides net income by the sum of the equity value at the beginning and end of the year divided by 2 net income is found on the income statement in the annual report stockholders equity is found at the bottom of the balance sheet in the annual report the income statement captures transactions from the entire year whereas the balance sheet is a snapshot in time as a result analysts divide net income by an average of the beginning and end of the time period for balance sheet line items if a business rarely experiences significant changes in its shareholders equity it is probably not necessary to use an average equity figure in the denominator of the calculation in situations where the shareholders equity does not change or changes by very little during a fiscal year the roe and roae numbers should be identical or at least similar an example of roaethe key equation is roae net income average stockholders equityfor example company xyz starts out last year with 1 000 000 in shareholder equity and finishes the next year with 1 500 000 in shareholder equity due to investments from investors leaving them with an average shareholder equity value of 1 250 000 for the year these figures can be found from the balance sheet of the last year and the end of the current year during the current year xyz earns 200 000 in net income found on the income statement for the end of the current year using the roae equation net income prior year shareholder equity current year shareholder value 2 the result is 200 000 1 250 000 16 gain investors will want to compare roe s and roae s between companies in similar sectors to see which are most profitable and efficient based on shareholder equity if company xyz is muddling along with a sub 10 roae and company abc is turning in a 20 roae investors will have a better understanding of where their investments are likely to perform better 