Understanding the Basic Concepts of Return on Equity

Cashmere (2012:204), return on equity or return on equity or rentability of own capital is the ratio to collectr net profit after tax with own capital. This ratio shows ef isiensi  the use of own capital, therefore the higher  the return on equity, the  better because it shows the more efficient the company in managing its own capital to generate net profit/ profit.  ROE is very important for shareholders and potential investors, because a high ROE and an increase in ROE will lead to a rise in stocks. That means the position  of the owner of the company is getting stronger, and vice versa. According  to Irmadelia Dilla Janati (2014), return on equity is a ratio used to measure the ability of own capital to generate profits for all shareholders (both ordinary shareholders and preferred shareholders) for their invested capital. According to Hery (2015:230), ROE is a ratio used to measure a company’s success in generating profits for shareholders or in other words a ratio that shows how much equity contributes in creating net profit. ROE is considered a representation of a shareholder’s wealth or company value. The higher the return on equity means the higher the amount of net profit generated from each dollar of funds embedded in the equity.

According to Jumingan (2014:141), ROE is used to measure the amount of return on shareholders’ investment. The figure shows how well the investment management of the shareholders is. The level of a t  ROE  has a positive relationship with the stock price,  so the greater the ROE, the greater the stock market price, because the amount of ROE gives an indication that the income that investors will receive will be  high  so    that investors will be interested in buying the stock, and this causes the stock market price to tend to  climb. Brigham & Houston (2010:149) is of the view that  return on equity is the ratio of net to ordinary equity, which serves to measure the rate  of return on  investment of ordinary shareholders. According to Hantono (2015:12), ROE is a ratio that shows the level obtained by business owners from the capital that has been spent on the business.

Return On Equity according to Agus Sartono (2010: 124) is measuring the company’s ability to obtain profits available to company shareholders. This ratio is influenced by  the size or size of the  company’s debt, if the proportion of debt is getting bigger, this ratio will be even greater.  Return On Equity (ROE) shows the company’s ability to generate profit after tax by using its own capital owned by the company (Hanafi and Halim, 2012: 177). According to Gitman (2012:82) that Return On Equity generally measures the returns earned on ordinary shareholders’ investments in companies.  Return On Equity (ROE) according to Harahap (2015:305) is a comparison between net profit after tax and total equity.  Return On Equity (ROE) is a measurement of the income available to company owners (both ordinary shareholders and preferred shareholders) of the capital they invest in the company. This ratio shows the power to generate a return on investment based on the shareholders’ book value. The higher this ratio, the  better, meaning that the position of the owner of the company is stronger. The most important ratio is return on equity, which is net profit for shareholders divided by total shareholders’ equity (Brigham & Houston, 2011:133).

An example of calculating return on equity is as follows :

  • PT Mei Jaya, in 2017 had each shareholder’s equity of Rp500 million and net profit generated of Rp2 billion.
  • ROE = × 100%

=  100%  ×

 = 400%

  • The company PT Mei Bong had an average shareholders’ equity of IDR 750 million, while the net profit generated at that time was IDR 1.5 billion.
  • ROE = × 100%

=  100%  ×

 = 200%

  • In 2021, the average equity of PT Mei Institute’s shareholders was IDR  625 million with a net profit of IDR 1 billion.
  • ROE = × 100%

=  100%  ×

 = 1.6 = 160%

  • A financial report issued as of January 1, 2021, PT Mei Group which is engaged in the industrial sector has a net profit after tax of IDR 500 million, the total equity of shareholders is IDR 800 million.
  • ROE = × 100%

=  100%  ×

 = 0.625 = 62.5%

  • In 2021, PT Mei Lim managed to get a total turnover of IDR 470 million, while the total expenditure was IDR 200 million. In the previous year, PT Mei Lim received funding of IDR 100 million, while the remaining initial capital of its founders was IDR 150 million.
  • ROE = × 100%

=  100%  ×

=  100%  ×

 = 1.08 = 108%

An example of calculating the  return on equity is as follows: inthe third quarter of 2021, PT Industri Jamu dan Farmasi Sido Muncul, Tbk.  (SIDO) recorded a profit for the current period of Rp865.5 billion. Meanwhile, the total equity amounted to IDR 3.06 trillion.

  • Profit for the period per month = IDR 865.5 billion ÷ 9 = IDR 96.17 billion
  • Annual profit for the current period = IDR 96.17 billion × 12 = IDR 1.154 trillion
  • Total equity = IDR 3.06 trillion
  • ROE = × 100%

 = 0.377 = 37.7%

  • PT Bank Rakyat Indonesia (Persero), Tbk (BBRI) scored a profit for the current period of IDR 19.07 trillion in the third quarter of 2021. Meanwhile, the total equity value was IDR 280.28 trillion.
  • Profit for the current period per month = IDR 19.07 trillion ÷ 9 = IDR 2.12 trillion
  • Annual profit for the current period = IDR 2.12 trillion × 12 = IDR 25.44 trillion
  • Total equity = IDR 280.28 trillion
  • ROE = × 100%

 = 0.091 = 9.1%


  • Astri and Indarti, 2010. Effect of Net Profit Margin (NPM), Return On Assets (ROA) and Return On Equity (ROE) On Stock Prices Listed In The LQ45 Issuer Index 2008-2010.
  • Brigham F. Eugene and Joel Houston. 2010. Fundamentals of Financial Management: Assetials Of Financial Management. Jakarta: Salemba Empat Publishers.
  • Wulan, Astri, dini and Iin Indarti, (2011). “Effect of Net Profit Margin (NPM), Return on Assets (ROA) and Effect of Return on Equity (ROE) on Stock Prices Listed in the LQ-45 Issuer Index for 20082010 Year”. Journal of Economics and Management. Widya Manggala College of Economics.

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Dr. Meiryani, S.E., Ak., M.M., M.Ak., CA.