Return on Average Equity (ROAE) is a financial ratio that measures the performance of a company based on its average shareholders' equity outstanding. The return on equity (ROE), a determinant of performance, is calculated by dividing net Income by the ending shareholders' equity value in the Balance Sheet. The measure is especially useful in situations where a business has been actively selling or buying back its shares, issuing large dividends, or experiencing significant gains or losses.
ROAE refers to a company's performance over a Fiscal Year, so the ROAE numerator is net income and the denominator is computed as the sum of the equity value at the beginning and end of the year, divided by 2.
The return on average equity (ROAE) can give a more accurate depiction of a company's corporate profitability, especially if the value of the shareholders' equity has changed considerably during a fiscal year.
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Formula for computing return on average equity-
ROAE = Net Income / Avg Stockholders' Equity
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