What is the return on stockholders' equity (after tax) ratio?

Definition of Return on Stockholders' Equity

The financial ratio return on stockholders' equity (or return on equity) is calculated by dividing a corporation's net income after income taxes by the average amount of stockholders' equity during the period of the net income.

Example of Return on Stockholders' Equity

Assume that a corporation without preferred stock had net income after tax of $100,000 for its most recent year. The corporation's stockholders’ equity was $950,000 at the beginning of the year and was $1,050,000 at the end of the year and the increase occurred at a uniform rate throughout the year. The corporation's return on stockholders’ equity was 10% ($100,000 divided by the average stockholders’ equity of $1,000,000).