Return on equity or ROE ( Return On Equity ) is one of the calculations included in the profitability ratio. ROE is a ratio calculation that shows a company’s ability to generate net income using its own capital and generate net income available to owners or investors.

ROE calculation can be used as a benchmark for the company’s financial performance . ROE is very dependent on the size of the company, for example for small companies would have a relatively small capital, so that the resulting ROE is small, and vice versa for large companies.

Return on equity (ROE) is the amount of return from net income to equity and expressed as a percent. ROE is used to measure the ability of a business entity to generate profits with equity invested in shareholders. ROE is expressed as a percentage and calculated by the ROE ( Return On Equity) formula comparing net income after tax with equity that has been invested by shareholders of the company (Van Horne and Wachowicz, 2005: 225).

This ratio shows the power to generate a return on investment based on the book value of the shareholders, and is often used in comparing two or more companies for good investment opportunities and effective cost management. ROE is very attractive to holders and prospective shareholders, and also to management, because the ratio is an important measure or indicator of shareholders value creation , meaning that the higher the ROE ratio, the higher the value of the company , this is certainly an attraction for investors to invest capital in the company.

Also read:  How to Calculate Return on Equity

Factors Affecting the Return on Owner’s Equity (ROE)

After knowing the explanation about ROE, the next explanation is the factors that influence ROE. Basically, there are two factors that affect the level of ROE, ie net profit ( net income ) and equity ( equity ):

Net income or N et Income

In accordance with the statement in the Indonesian Institute of Accountants (1999: 94): Net income (net income) is often used as a performance measure or as a basis for other measures such as ROE or earnings per share. The elements directly related to the measurement of profit are income or expenses.

Equity or Equity

Equity ( Equity ) is the amount of capital that represents a person’s ownership rights over company assets. From this equity is known how much ownership of a person against a company. In financial statements, we can find equity in the Statement of Financial Position (Balance Sheet). Types of equity, namely paid up capital, retained earnings, dividends and shares.

How to Calculate Return on Equity (ROE)

The following is the formula for calculating ROE along with cases and how to calculate it, which in Indonesian is often called the Equity Returns Ratio.

The ROE ( Return On Equity ) formula is as follows:

Return On Equity = net profit after tax: equity

Problems example:

In 2017, the average equity of PT Maju Bersama’s shareholders, amounted to Rp625,000,000 with a net profit of Rp1,000,000,000. Then the return on equity from the above calculation is.

Rp1,000,000,000: Rp.625,000,000 = 1.6 or 160% ROE

Information:

ROE calculation results close to 1 show the more effective and efficient use of company equity to generate revenue, and vice versa if ROE is approaching 0 means the company is unable to manage the available capital efficiently to generate revenue.

How to use ROE information

Here’s how to use ROE information:

1. Compare company ROE for the past 5-10 years. This will provide information on company growth more significantly. Although the increase in ROE in the range of 5-10 years does not guarantee the company will continue to grow at that speed. But at least from this information we will find a graph of the average acquisition of the company.
2. Compare ROE figures from companies of the same size and industry. Perhaps, the ROE number is low because the industry they work with has a low profit margin.
3. Properties with high growth rates tend to have high ROE because they are able to generate additional income without the need for external funding.

Also read: 5 Types of Online Investment that You Need to Know

Because of the importance of calculating return on equity (ROE) for companies to attract investor interest as well as a form of accountability for shareholders, it is better for companies to always prepare and share information on these equity returns regularly and well to those who need them.

This ROE illustrates well to measure the extent to which a company in using every dollar they get. Therefore an investor must always explore a market need to get a company that can gain a good & reasonable ROE number.

For example if there are companies that have a ROE record of 7%. Of course companies with 7% ROE will be less attractive to investors, so it’s only natural because deposits in Indonesia are in that range. Investors will assume, why choose an investment with high risk if the return obtained is no better than the investment instrument, namely deposits, sukuk and other bonds.

This counting activity seems difficult to do. If a company experiences problems in calculating equity, the way that can be done is to use the help of online accounting software . One online accounting software that can be relied upon to calculate is Journal.

So, What Is the Difference between ROE and ROA ( Return of Assets )?

Some people are sometimes still confused about the difference in analysis between Return of Equity and Return of Assets and when they should be used. Return of Equity (ROE) is simply an analysis of how effectively an entrepreneur spends his capital on doing business. ROE does not involve debt in its formulation and analysis. So companies that have large debts will be separated from the calculation of investment analysis.

Therefore many investors do not use Return On Equity (ROE) analysis , and rather use Return On Assets (ROA) as an indicator because ROA shows an efficiency of a company in using all assets and also includes debts to the company.

Journals, online accounting software as a platform for providing online accounting reports will help companies to have all types of financial reports that a company needs including equity returns reports quickly and accurately. A journal that is equipped with an integrated system is capable of producing precise and accurate calculations.

That way, the company does not need to worry about mistakes that can hinder administrative work. The work will be easier because the Journal can be accessed through gadgets anywhere and anytime. The company can immediately publish information about ROE calculations at any time, because all financial transaction data has been neatly and real-time recorded in the Journal software.

 

<!–

–>