The return on equity (ROE), measures how well the company is putting the common shareholders' equity to work in making a profit for the company. A company with a high ROE is making more profit per dollar invested than a company with a low ROE. For example, a company with a 15 percent ROE generates 15 cents of profit for shareholders for every dollar invested in the company. Preferred shareholders' equity is not included in ROE calculations.
1. Subtract the dividends paid to preferred shareholders from the company's net income to find the net income available to common shareholders. For example, if the company has a net income of $150 million and pays $1 million in preferred stock dividends, the company has $149 million in net income available to common shareholders.
2. Subtract the preferred shareholder's equity from the total stockholders' equity to find the common stock equity. In this example, if the company has $1 billion in total shareholder's equity and $20 million in preferred shareholders' equity, subtract $20 million from $1 billion to find the company has $980 million in common shareholders' equity.
3. Divide the net income available to common shareholders by the common shareholders' equity to calculate the return on equity for the stock as a decimal. In this example, divide $149 million by $980 million to get 0.152.
4. Multiply the result by 100 to find the return on equity expressed as a percentage. Finishing this example, multiply 0.152 by 100 to find the return on equity for the stock equals 15.2 percent.