Return on Equity (ROE) Calculator: Income & Equity

Is a return on equity of 20.00% healthy?

On the defaults — $1,250,000.00 of shareholders’ equity and $250,000.00 of net income — the return on equity is 20.00%, the equity needed for a 25.00% return is $1,000,000.00, and the net income needed for a 25.00% return is $312,500.00. The return on equity — net income divided by shareholders’ equity — is the equity test: how much profit each dollar the owners put in produces. A return above 20% is strong for most businesses; 10–20% is typical; below 10% is weak and means the owners’ money is not pulling its weight. A negative return means the business lost money — with net income of −$125,000.00 the return is −10.00%, a loss on equity, and with net income of −$250,000.00 the return is −20.00%. The same return can mean different things by industry — a software company needs little equity, a bank needs a lot — so compare within an industry, not across them. A very high return can also mean the business is heavily leveraged: it borrowed a lot, so a small equity base makes the return look big while the risk is real.

Four things about the model are worth stating plainly. First, the return on equity is the net income divided by the shareholders’ equity — $250,000.00 ÷ $1,250,000.00 = 20.00%. Second, the equity needed at the target is the net income divided by the target — $250,000.00 ÷ 0.25 = $1,000,000.00. Third, the net income needed at the target is the shareholders’ equity times the target — $1,250,000.00 × 0.25 = $312,500.00. And fourth, each dollar of equity earns 20 cents — the return is the equity test, not the bottom line; all listed in Accuracy & limitations.

The worked example, line by line

Setup: $1,250,000.00 of shareholders’ equity, $250,000.00 of net income, target ROE 25.00%.

Line 1 — the return on equity. The return on equity is $250,000.00 ÷ $1,250,000.00 × 100 = 20.00%.

Line 2 — the equity needed. The equity needed for a 25.00% return is $250,000.00 ÷ 0.25 = $1,000,000.00.

Line 3 — the net income needed. The net income needed for a 25.00% return is $1,250,000.00 × 0.25 = $312,500.00.

Line 4 — the check. 20.00% × $1,250,000.00 = $250,000.00, the net income; and $250,000.00 ÷ 20.00% = $1,250,000.00, the shareholders’ equity.

Every branch, checked

Net income $500,000: Return on equity 40.00%; net income $500,000.00; equity needed for the 25.00% target $2,000,000.00; net income needed for the 25.00% target $312,500.00 — With net income of $500,000.00 the return rises to 40.00% — each dollar of equity earns 40 cents.

Equity $2,500,000: Return on equity 10.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $625,000.00 — With equity of $2,500,000.00 the return falls to 10.00% — the bottom of the typical band.

Net income $312,500: Return on equity 25.00%; net income $312,500.00; equity needed for the 25.00% target $1,250,000.00; net income needed for the 25.00% target $312,500.00 — With net income of $312,500.00 the return is 25.00% — exactly on the target.

Equity $1,000,000: Return on equity 25.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $250,000.00 — With equity of $1,000,000.00 the return is 25.00% — exactly on the target.

Net income $625,000: Return on equity 50.00%; net income $625,000.00; equity needed for the 25.00% target $2,500,000.00; net income needed for the 25.00% target $312,500.00 — With net income of $625,000.00 the return is 50.00% — strong, and worth asking whether the business is asset-light or heavily leveraged.

Equity $250,000: Return on equity 100.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $62,500.00 — With equity of $250,000.00 the return is 100.00% — each dollar of equity earns a dollar of profit.

Net income −$125,000: Return on equity -10.00%; net income $−125,000.00; equity needed for the 25.00% target $−500,000.00; net income needed for the 25.00% target $312,500.00 — With net income of −$125,000.00 the return is −10.00% — a loss on equity: the business loses 10 cents on every dollar of equity.

The reverses, worked backwards

Largest whole-dollar equity for the ROE to STAY at or above 25.00%: At the displayed $1,000,000 the figures are Return on equity 25.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $250,000.00. At the displayed $1,000,000 the return on equity is 25.00%. At $1,000,001 the equity is $1 over the $1,000,000 allowed — and the unrounded return is 24.999975% approximately, which displays as 25.00% after rounding, so $1,000,000 is the largest whole-dollar equity for the return to stay at or above 25.00%.

Smallest whole-dollar net income for the ROE to reach 25.00%: At the displayed $312,500 the figures are Return on equity 25.00%; net income $312,500.00; equity needed for the 25.00% target $1,250,000.00; net income needed for the 25.00% target $312,500.00. At the displayed $312,500 the return on equity is 25.00%. At $312,499 the net income is $1 short of the $312,500 needed — and the unrounded return is 24.999920% approximately, which displays as 25.00% after rounding, so $312,500 is the smallest whole-dollar net income for the return to reach 25.00%.

Largest whole-dollar equity for the ROE to STAY at or above 20.00%: At the displayed $1,250,000 the figures are Return on equity 20.00%; net income $250,000.00; equity needed for the 20.00% target $1,250,000.00; net income needed for the 20.00% target $250,000.00. At the displayed $1,250,000 the return on equity is 20.00%. At $1,250,001 the equity is $1 over the $1,250,000 allowed — and the unrounded return is 19.999984% approximately, which displays as 20.00% after rounding, so $1,250,000 is the largest whole-dollar equity for the return to stay at or above 20.00%.

Smallest whole-dollar net income for the ROE to reach 40.00%: At the displayed $500,000 the figures are Return on equity 40.00%; net income $500,000.00; equity needed for the 40.00% target $1,250,000.00; net income needed for the 40.00% target $500,000.00. At the displayed $500,000 the return on equity is 40.00%. At $499,999 the net income is $1 short of the $500,000 needed — and the unrounded return is 39.999920% approximately, which displays as 40.00% after rounding, so $500,000 is the smallest whole-dollar net income for the return to reach 40.00%.

Smallest whole-dollar net income for the ROE to reach 10.00%: At the displayed $125,000 the figures are Return on equity 10.00%; net income $125,000.00; equity needed for the 10.00% target $1,250,000.00; net income needed for the 10.00% target $125,000.00. At the displayed $125,000 the return on equity is 10.00%. At $124,999 the net income is $1 short of the $125,000 needed — and the unrounded return is 9.999920% approximately, which displays as 10.00% after rounding, so $125,000 is the smallest whole-dollar net income for the return to reach 10.00%.

Largest whole-dollar equity for the ROE to STAY at or above 50.00%: At the displayed $500,000 the figures are Return on equity 50.00%; net income $250,000.00; equity needed for the 50.00% target $500,000.00; net income needed for the 50.00% target $250,000.00. At the displayed $500,000 the return on equity is 50.00%. At $500,001 the equity is $1 over the $500,000 allowed — and the unrounded return is 49.999900% approximately, which displays as 50.00% after rounding, so $500,000 is the largest whole-dollar equity for the return to stay at or above 50.00%.

A warning about the neighbours: every neighbour above shows as the target when rounded to two decimals, but its unrounded return is short of the target. A lender underwriting on the unrounded return would still say no. The page prints the unrounded neighbour value in full so the rounding does not mislead you.

What the defaults assume

The defaults are $250,000.00 of net income, $1,250,000.00 of shareholders’ equity and a target ROE of 25.00% — Return on equity 20.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $312,500.00. With Net income $500,000, Return on equity 40.00%; net income $500,000.00; equity needed for the 25.00% target $2,000,000.00; net income needed for the 25.00% target $312,500.00. With Equity $2,500,000, Return on equity 10.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $625,000.00. With Net income $312,500, Return on equity 25.00%; net income $312,500.00; equity needed for the 25.00% target $1,250,000.00; net income needed for the 25.00% target $312,500.00. With Equity $1,000,000, Return on equity 25.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $250,000.00. With Net income $625,000, Return on equity 50.00%; net income $625,000.00; equity needed for the 25.00% target $2,500,000.00; net income needed for the 25.00% target $312,500.00. With Equity $250,000, Return on equity 100.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $62,500.00. With Net income −$125,000, Return on equity -10.00%; net income $−125,000.00; equity needed for the 25.00% target $−500,000.00; net income needed for the 25.00% target $312,500.00. With Equity $0, Return on equity — (undefined: no equity to divide by); net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $0.00. With Net income $0, Return on equity 0.00%; net income $0.00; equity needed for the 25.00% target $0.00; net income needed for the 25.00% target $312,500.00. With Net income $234,567, equity $1,500,000, Return on equity 15.64%; net income $234,567.00; equity needed for the 25.00% target $938,268.00; net income needed for the 25.00% target $375,000.00. With Net income −$250,000, Return on equity -20.00%; net income $−250,000.00; equity needed for the 25.00% target $−1,000,000.00; net income needed for the 25.00% target $312,500.00. With Equity $5,000,000, Return on equity 5.00%; net income $250,000.00; equity needed for the 25.00% target $1,000,000.00; net income needed for the 25.00% target $1,250,000.00. With Net income $250,001, Return on equity 20.00%; net income $250,001.00; equity needed for the 25.00% target $1,000,004.00; net income needed for the 25.00% target $312,500.00. With Target bars — net income $250,000, equity $1,250,000, equity needed at the 10.00% target $2,500,000.00; at the 40.00% target $625,000.00; net income needed at the 10.00% target $125,000.00; at the 40.00% target $500,000.00.

A note on the rounding: with net income of $234,567 and equity of $1,500,000 the unrounded return on equity is 15.637800, which rounds half-up to 15.64% — the page prints the unrounded value so the rounding does not mislead you. With net income of $250,001 and equity of $1,250,000 the unrounded return on equity is 20.000080, which rounds to 20.00%.

Output · formula · meaning

Who uses this

• The small-business owner checking the year: they learn $250,000.00 of net income on $1,250,000.00 of shareholders’ equity gives a return of 20.00% — and they check the $1,000,000 reverse to see the largest equity that still reaches 25.00%.
• The lender sizing a loan: they learn a return above 20% is strong and 10–20% is typical — and they check the $312,500 reverse to see the smallest net income that reaches 25.00%.
• The owner whose return slipped to 10.00%: they learn the business is at the bottom of the typical band — and they check the $125,000 reverse to see the smallest net income that reaches 10.00%.
• The founder with a 50.00% return: they learn the business may be asset-light or heavily leveraged — and they check the $500,000 reverse to see the largest equity that stays at or above 50.00%.

Accuracy & limitations

The math is first-principles: the return on equity is the net income divided by the shareholders’ equity, rounded to two decimals half-up; the equity needed at the target is the net income divided by the target; the net income needed at the target is the shareholders’ equity times the target. The reverses are judged on the UNROUNDED return: a neighbour one dollar short shows as the target when rounded to two decimals, but its unrounded return is below the target, so it does not meet the bar — the page prints the unrounded neighbour value in full. What the model cannot do is judge the business: net income is profit after all costs and shareholders’ equity is what the owners put in plus the profits the business kept — and the same return means different things by industry, so compare within an industry, not across them; the 20% line is the usual line, not a rule, and some industries run happily below it; a very high return can also mean the business borrowed a lot, so a small equity base makes the return look big while the risk is real; and if equity goes negative (liabilities exceed assets), the return stops meaning anything. Use it to see how much profit each dollar of equity produces — then read the rest of the statements.

Frequently asked questions