SFoyil

Return on Equity = Net Income / Shareholder Equity
Shareholder Equity = Common Stock + Retained Earnings
Quote:The way I’ve explained equity to myself is to think of it like my house and my mortgage. I have a $500K house, my mortgage is $400K, therefore I have $100K equity. I get that. But then how does the retained earning fit into that? Does the analogy flow that if I had rented a room (say for $4K a year) and had made $20K from that and not spent it, that would be retained earnings, so therefore the $100K of equity is $80K stock and $20K retained earnings shown on my balance sheet? So to calculate my ROE, I would do $4K / ($100K).

So your Equity equals $120K = $100K (house 500 - mortgage 400) + $20K (you’ve earned and not spent)
and your ROE is $4K / $120K.