Return on Average Equity (ROAE): Meaning and Example

The return on average equity (ROAE) measures profit relative to the average shareholder equity employed during the period. It is a refinement of return-on-equity analysis that reduces distortion from capital changes during the year.

How It Works

Average equity is often more informative than ending equity when a company issues shares, repurchases stock, or experiences large retained-earnings changes during the reporting period. Banks and financial firms often use ROAE because equity balances can shift materially over time.

A common form is:

ROAE = net income / average shareholder equity

Worked Example

If a bank earns $40 million and its average equity over the year is $400 million, its ROAE is 10%.

Scenario Question

A shareholder says, “ROAE and ROE always mean the same thing.”

Answer: Not always. They differ when average equity and ending equity are materially different.

Related Terms

• Return on Equity (ROE): ROAE is a closely related measure that uses average rather than end-of-period equity.
• Net Income: Net income is usually the numerator in ROAE.
• Return on Average Assets (ROAA): ROAA applies the same averaging idea to assets rather than equity.