Return on Equity Using EPS

by Lisa Bigelow

There are a variety of ways that you can analyze how much money a company is making for its owners and investors. Profit margin measurements, income and expense analysis and return on investment are some of the most common ways. Two additional ways are calculating the company's return on equity and its earnings per share.

Return on Equity

Like many investor tools, calculating return on equity is relatively simple. To do it correctly you only need two pieces of data: the company's net profit and the amount of shareholder equity. Net profit is usually reported on the income statement, also called the profit and loss statement (P and L). Companies that have shareholder equity may report it on a balance sheet or on a separate shareholder equity statement. To calculate return on equity, divide the net profit by shareholder equity. The result is return on equity.

What Return on Equity Does

Return on equity tells you how much money the company is earning for its owners and investors. For example, imagine that you purchased an oil painting for $5,000. Eventually, you tired of the painting and sold it for $7,500. Your net profit is $2,500, because $7,500 less $5,000 equals $5,000. Your return on equity is 50 percent, because $2,500 divided by $5,000 is 50 percent. Keep in mind that these figures don't necessarily mean anything by themselves; they're most useful when you can compare them to comparable data from previous years or similar companies.

Earnings Per Share

The return on equity calculation is a top level analysis data point. Earnings per share, on the other hand, allows the analyst to see how much money is earned for each share of common stock that the company has issued. Commonly called EPS, it's calculated by dividing net profit by the total number common shares outstanding. Successful companies strive to consistently increase their earnings per share, and these results are typically reported to the public on a quarterly basis.

Calculating Return on Equity Using EPS

If you know the company's EPS calculation, you can figure the return on equity figure by reading the company's balance sheet or shareholder equity statement. Remember that to calculate EPS, you must know the company's net profit and the number of common shares outstanding. To calculate return on equity, divide the net profit from the EPS calculation by the total shareholder equity from the balance sheet. If you only have the EPS figure and not the calculation behind it, contact the Securities and Exchange Commission (SEC). Publicly traded companies must report their financial data to the SEC.

About the Author

Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.