{"id":29164,"date":"2024-05-22T12:06:53","date_gmt":"2024-05-22T17:06:53","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=29164"},"modified":"2024-11-19T22:45:39","modified_gmt":"2024-11-20T03:45:39","slug":"return-on-equity-roe","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/","title":{"rendered":"Return on Equity (ROE): Meaning, Calculations, and Excel Examples"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Return on Equity (ROE): Meaning, Calculations, and Excel Examples<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/#Video_Table_of_Contents\">Video Table of Contents:<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/#Why_Does_Return_on_Equity_ROE_Matter_So_Much_for_Banks\">Why Does Return on Equity (ROE) Matter So Much for Banks?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/#Return_on_Equity_ROE_Example_Calculation_and_Benchmarking_for_Large_Commercial_Banks\">Return on Equity (ROE): Example Calculation and Benchmarking for Large Commercial Banks<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/#Return_on_Equity_ROE_for_Regulated_Utilities_Companies\">Return on Equity (ROE) for Regulated Utilities Companies<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/#Final_Thoughts_on_Return_on_Equity_ROE\">Final Thoughts on Return on Equity (ROE)<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Return on Equity (ROE) Definition:<\/strong> The Return on Equity in corporate finance equals a company\u2019s Net Income in a period, such as 1 year, divided by its average Shareholders\u2019 Equity over that same period; it measures a company\u2019s efficiency in generating after-tax profits based on its Common Equity, or its cumulative, saved-up after-tax earnings + capital issued to shareholders.<\/p><\/blockquote>\n<p>This definition may seem almost the same as the one for <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-assets-roa\/\" target=\"_blank\" rel=\"noopener\">Return on Assets<\/a>, and it is quite similar.<\/p>\n<p>Both metrics are important for Balance Sheet-centric companies, such as commercial banks and insurance firms, and both measure efficiency.<\/p>\n<p><strong>The difference is that ROE is all about a company\u2019s <em>Equity<\/em>, or Total Assets minus Total Liabilities, so it is more relevant <em>specifically<\/em> for the equity investors or common shareholders.<\/strong><\/p>\n<p>You can calculate ROE for a company in any industry, but in practice, it is the most useful for 3 types of companies:<\/p>\n<ol>\n<li><strong>Commercial Banks<\/strong> \u2013 ROE is a key metric that determines banks\u2019 overall efficiency and is highly correlated with the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/bank-modeling\/price-to-book-value\/\" target=\"_blank\" rel=\"noopener\">P \/ BV valuation multiple<\/a>.<\/li>\n<li><strong>Insurance Firms<\/strong> \u2013 Same, as the business model is similar.<\/li>\n<li><strong>Regulated Utility Companies<\/strong> \u2013 Here, ROE is a <strong>key driver<\/strong> in <a href=\"https:\/\/mergersandinquisitions.com\/financial-modeling\/\" target=\"_blank\" rel=\"noopener\">financial models<\/a> and determines the <strong>rates<\/strong> that utility companies can charge for electricity, gas, and water.<\/li>\n<\/ol>\n<p>In the first two cases, within a set of <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/comparable-company-analysis-cca\/\" target=\"_blank\" rel=\"noopener\">comparable public companies<\/a>, firms with higher ROEs should trade at higher P \/ BV multiples.<\/p>\n<p>In the third case, the ROE is <em>determined by government regulators<\/em>, and the company must <em>operate<\/em> based on that restriction, so ROE becomes a key input in financial models.<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/ROE\/101-06-Return-on-Equity-ROE-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Return on Equity (ROE) \u2013 Presentation Slides (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/ROE\/101-06-ROE-Comparisons.xlsx\" target=\"_blank\" rel=\"noopener\">Return on Equity (ROE) for Banks and Regulated Utility Companies (XL)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/ROE\/101-06-MGE-10K.pdf\" target=\"_blank\" rel=\"noopener\">MGE Energy &#8211; Full 10-K with Highlights (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Financial-Statement-Analysis\/ROE\/101-06-MGE-10K-Excerpts.pdf\" target=\"_blank\" rel=\"noopener\">MGE Energy &#8211; Key Excerpts from the 10-K (PDF)<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Video_Table_of_Contents\"><\/span><strong>Video Table of Contents:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><strong>0:00:<\/strong> Introduction<\/p>\n<p><strong>4:36:<\/strong> Part 1: Why ROE for Banks and Insurance?<\/p>\n<p><strong>5:35:<\/strong> Part 2: ROE for Banks (JPM, Citi, Wells, and BofA)<\/p>\n<p><strong>7:42:<\/strong> Part 3: ROE for Utilities (MGE Energy)<\/p>\n<p><strong>11:40:<\/strong> Recap and Summary<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_Does_Return_on_Equity_ROE_Matter_So_Much_for_Banks\"><\/span><strong>Why Does Return on Equity (ROE) Matter So Much for Banks?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Return on Equity is far more significant in the <strong>financial sector<\/strong> because many of these companies generate revenue and profits based <em>directly<\/em> on their <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/\" target=\"_blank\" rel=\"noopener\">Balance Sheets<\/a>:<\/p>\n<ul>\n<li><strong>Loans<\/strong> are a key driver in all bank models, but a bank cannot just grow its Loans at arbitrary rates.<\/li>\n<li>The more Loans a bank has, the more in \u201cregulatory capital\u201d (Shareholders\u2019 Equity) it needs to <strong>support that Loan Growth<\/strong>. It can build up this Equity internally via <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\" rel=\"noopener\">Net Income generation<\/a> and externally via capital raised from shareholders.<\/li>\n<li>Return on Equity (ROE) is <strong>critical<\/strong> because it represents how efficiently the bank generates after-tax profits based on this \u201cbuffer capital\u201d required to back up its lending activities in the case of unexpected losses.<\/li>\n<\/ul>\n<p>If a bank does not use this \u201cbuffer capital\u201d very efficiently, investors will penalize it, and it will tend to trade at lower valuation multiples.<\/p>\n<p>But if it does use this &#8220;buffer capital&#8221; efficiently, it will be rewarded in the form of higher <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/valuation-multiples\/\" target=\"_blank\" rel=\"noopener\">valuation multiples<\/a>.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Return_on_Equity_ROE_Example_Calculation_and_Benchmarking_for_Large_Commercial_Banks\"><\/span><strong>Return on Equity (ROE): Example Calculation and Benchmarking for Large Commercial Banks<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To demonstrate the ROE calculation, we\u2019ll examine the top 4 commercial banks in the U.S. \u2013 JP Morgan, Citi, Wells Fargo, and Bank of America \u2013 with a focus on Citi vs. JPM.<\/p>\n<p>Here are the numbers over a 5-year period for each bank:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29165 size-full\" title=\"JPM vs. Citi - Return on Equity (ROE)\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120001\/01-JPM-vs-Citi-ROE.jpg\" alt=\"JPM vs. Citi - Return on Equity (ROE)\" width=\"1302\" height=\"592\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120001\/01-JPM-vs-Citi-ROE.jpg 1302w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120001\/01-JPM-vs-Citi-ROE-300x136.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120001\/01-JPM-vs-Citi-ROE-1024x466.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120001\/01-JPM-vs-Citi-ROE-768x349.jpg 768w\" sizes=\"(max-width: 1302px) 100vw, 1302px\" \/><\/p>\n<p>JPM\u2019s median ROE over this period is twice as high as Citi\u2019s, so it is no surprise that its P \/ BV multiple of 2.0x far exceeds the Citi multiple of 0.7x:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-29166\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120029\/02-ROE-Top-4-Banks.jpg\" alt=\"Return on Equity (ROE) for the Top 4 U.S. Banks\" width=\"1292\" height=\"268\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120029\/02-ROE-Top-4-Banks.jpg 1292w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120029\/02-ROE-Top-4-Banks-300x62.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120029\/02-ROE-Top-4-Banks-1024x212.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120029\/02-ROE-Top-4-Banks-768x159.jpg 768w\" sizes=\"(max-width: 1292px) 100vw, 1292px\" \/><\/p>\n<p>Interestingly, JPM\u2019s P \/ E multiple is lower than Citi\u2019s, but this might be due to issues such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/non-recurring-expenses\/\" target=\"_blank\" rel=\"noopener\">non-recurring charges<\/a>.<\/p>\n<p>Also, the P \/ E multiple tends to correlate more strongly with Net Income <em>Growth<\/em> or Earnings per Share <em>Growth<\/em>.<\/p>\n<p>If we expand this set and examine the 4 biggest commercial banks in the U.S., R^2 between ROE and P \/ BV is <strong>0.99<\/strong>!<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29167 size-full\" title=\"Return on Equity (ROE) vs. P \/ BV for U.S. Banks\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120055\/03-ROE-PBV-Banks.jpg\" alt=\"Return on Equity (ROE) vs. P \/ BV for U.S. Banks\" width=\"608\" height=\"335\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120055\/03-ROE-PBV-Banks.jpg 608w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120055\/03-ROE-PBV-Banks-300x165.jpg 300w\" sizes=\"(max-width: 608px) 100vw, 608px\" \/><\/p>\n<p>Of course, ROE is not the only cause, as Loan Growth, the Net Interest Margin (NIM), and regulatory capital differences also factor in, but it is clearly important if R^2 is 0.99.<\/p>\n<p>Interestingly, this correlation is <strong>non-existent<\/strong> for ROE vs. the P \/ E multiples:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29168 size-full\" title=\"Return on Equity (ROE) vs. P \/ E for U.S. Banks\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120121\/04-ROE-PE-Banks.jpg\" alt=\"Return on Equity (ROE) vs. P \/ E for U.S. Banks\" width=\"796\" height=\"486\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120121\/04-ROE-PE-Banks.jpg 796w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120121\/04-ROE-PE-Banks-300x183.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120121\/04-ROE-PE-Banks-768x469.jpg 768w\" sizes=\"(max-width: 796px) 100vw, 796px\" \/><\/p>\n<p>In this case, we\u2019d focus on the P \/ BV multiples to value these banks because the P \/ E multiples are close to nonsensical.<\/p>\n<p>Given that JPM is far outperforming the other companies in terms of Loan Growth and ROE, its P \/ BV should be significantly higher as well.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Return_on_Equity_ROE_for_Regulated_Utilities_Companies\"><\/span><strong>Return on Equity (ROE) for Regulated Utilities Companies<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In the <a href=\"https:\/\/mergersandinquisitions.com\/power-utilities-investment-banking\/\" target=\"_blank\" rel=\"noopener\">power &amp; utilities sector<\/a>, ROE is also quite important, but for different reasons.<\/p>\n<p>In this sector, regulated utilities companies have a <strong>\u201cRate Base,\u201d<\/strong> which represents the book value of their power plants, transmission lines, distributions, and other infrastructure, with some adjustments.<\/p>\n<p>Essentially, it\u2019s Net PP&amp;E on the Balance Sheet with deductions for unregulated power assets and Deferred Tax Liabilities and additions for Working Capital and a portion of the Construction\/Work-in-Progress.<\/p>\n<p>Regulators then set the <strong>allowed Debt \/ Total Capital ratio<\/strong> that can fund these assets and the <strong>authorized<\/strong> <strong>Return on Equity (ROE)<\/strong>.<\/p>\n<p>The company then uses these requirements to \u201cback into\u201d the rates it is allowed to charge for its electricity, gas, and water.<\/p>\n<p>To illustrate, let\u2019s walk through a simple example for MGE Energy, a utility company based in Wisconsin in the U.S.<\/p>\n<p>MGE provides both electricity and gas, but we\u2019ll focus on just the electricity segment here to simplify and save time.<\/p>\n<p>The company\u2019s <strong>Average Rate Base<\/strong> for just Electricity in the historical period is $1.16 billion according to the filings:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29169 size-full\" title=\"Electric Rate Base for MGE Energy\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120146\/05-Electric-Rate-Base.jpg\" alt=\"Electric Rate Base for MGE Energy\" width=\"1764\" height=\"432\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120146\/05-Electric-Rate-Base.jpg 1764w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120146\/05-Electric-Rate-Base-300x73.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120146\/05-Electric-Rate-Base-1024x251.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120146\/05-Electric-Rate-Base-768x188.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120146\/05-Electric-Rate-Base-1536x376.jpg 1536w\" sizes=\"(max-width: 1764px) 100vw, 1764px\" \/><\/p>\n<p>The regulators allow an Equity \/ Total Capital ratio of 55.63%, which means that MGE\u2019s \u201cElectric Equity\u201d is $646.7 million.<\/p>\n<p>At an Authorized ROE of 9.8%, this means the company could earn a Net Income of $63.4 million on this Electric Rate Base in the historical period:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29170 size-full\" title=\"Authorized ROE and Net Income\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120208\/06-Authorized-ROE-Net-Incom.jpg\" alt=\"Authorized ROE and Net Income\" width=\"820\" height=\"522\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120208\/06-Authorized-ROE-Net-Incom.jpg 820w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120208\/06-Authorized-ROE-Net-Incom-300x191.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120208\/06-Authorized-ROE-Net-Incom-768x489.jpg 768w\" sizes=\"(max-width: 820px) 100vw, 820px\" \/><\/p>\n<p>According to the 10-K filing, MGE\u2019s effective tax rate is 19.1%, so we can say the Pre-Tax Income is $63.4 \/ (1 \u2013 19.1%) = $78.3 million.<\/p>\n<p>And then we can add back the company\u2019s expenses, including the Net Interest Expense, Depreciation &amp; Amortization, Operating Expenses, and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cogs\/\" target=\"_blank\" rel=\"noopener\">COGS<\/a> for this segment, to determine the \u201cAllowed\u201d Revenue:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29171 size-full\" title=\"Authorized Revenue\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120235\/07-Authorized-Revenue.jpg\" alt=\"Authorized Revenue\" width=\"804\" height=\"708\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120235\/07-Authorized-Revenue.jpg 804w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120235\/07-Authorized-Revenue-300x264.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120235\/07-Authorized-Revenue-768x676.jpg 768w\" sizes=\"(max-width: 804px) 100vw, 804px\" \/><\/p>\n<p>These expenses all come directly from the company\u2019s filings, where they split up the numbers by segment.<\/p>\n<p>Elsewhere in the filing, the company discloses its total electricity sales of 3,291,110 Kilowatt-Hours (kWh) <em>in thousands<\/em>\u2026 which means this is actually Megawatt-Hours (MWh):<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29172 size-full\" title=\"Electricity Sales in MWh\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120300\/08-Electricity-Sales-kWh.jpg\" alt=\"Electricity Sales in MWh\" width=\"1680\" height=\"699\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120300\/08-Electricity-Sales-kWh.jpg 1680w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120300\/08-Electricity-Sales-kWh-300x125.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120300\/08-Electricity-Sales-kWh-1024x426.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120300\/08-Electricity-Sales-kWh-768x320.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120300\/08-Electricity-Sales-kWh-1536x639.jpg 1536w\" sizes=\"(max-width: 1680px) 100vw, 1680px\" \/><\/p>\n<p>So, we take the estimated Revenue in millions USD, divide by the electricity sales in MWh, and multiply by 1,000 to get the rate in $ \/ kWh (without the 1,000, this would be in $ \/ Watt-Hour, which is not a standard metric):<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29173 size-full\" title=\"Electricity Rate in kWh\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120609\/09-Electricity-Rate-kWh.jpg\" alt=\"Electricity Rate in kWh\" width=\"1740\" height=\"730\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120609\/09-Electricity-Rate-kWh.jpg 1740w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120609\/09-Electricity-Rate-kWh-300x126.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120609\/09-Electricity-Rate-kWh-1024x430.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120609\/09-Electricity-Rate-kWh-768x322.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120609\/09-Electricity-Rate-kWh-1536x644.jpg 1536w\" sizes=\"(max-width: 1740px) 100vw, 1740px\" \/><\/p>\n<p>A <a href=\"https:\/\/www.wisconsinpublicservice.com\/payment-bill\/wi-rates\" target=\"_blank\" rel=\"noopener\">quick online search<\/a> reveals that <a href=\"https:\/\/www.energysage.com\/local-data\/electricity-cost\/wi\/\" target=\"_blank\" rel=\"noopener\">the average electricity rate paid by residents of Wisconsin<\/a> at this time was in a similar range as the $0.15 \/ kWh shown here:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29174 size-full\" title=\"Wisconsin Electricity Rates\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120635\/10-WI-Electricity-Rates.jpg\" alt=\"Wisconsin Electricity Rates\" width=\"1220\" height=\"811\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120635\/10-WI-Electricity-Rates.jpg 1220w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120635\/10-WI-Electricity-Rates-300x199.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120635\/10-WI-Electricity-Rates-1024x681.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22120635\/10-WI-Electricity-Rates-768x511.jpg 768w\" sizes=\"(max-width: 1220px) 100vw, 1220px\" \/><\/p>\n<p>If we were building a <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement model<\/a> or valuation for MGE, this Electricity Rate would change in each period based on the Rate Base, Authorized ROE, Operating Expenses, and capital structure.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Final_Thoughts_on_Return_on_Equity_ROE\"><\/span><strong>Final Thoughts on Return on Equity (ROE)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Return on Equity is useful mostly for <strong>commercial banks<\/strong>, <strong>insurance firm<\/strong>, and <strong>regulated utilities<\/strong> because it tells you something about the company\u2019s operational efficiency and valuation (financials) or acts as a key model\/operational driver (utilities).<\/p>\n<p>While you can calculate ROE for other types of companies, it\u2019s far less useful because <strong>it depends on the company\u2019s capital structure<\/strong>.<\/p>\n<p>So, it has the same pitfalls as a valuation multiple like P \/ E, which is also affected by the company\u2019s mix of Debt and Equity.<\/p>\n<p>Normally, when you value and benchmark companies in other industries, you want to do so on a <strong>capital structure-neutral basis<\/strong>, i.e., by factoring in <em>all<\/em> the investor groups with metrics like <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/roic-return-on-invested-capital\/\" target=\"_blank\" rel=\"noopener\">Return on Invested Capital<\/a> and multiples like <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/ebit-vs-ebitda\/\" target=\"_blank\" rel=\"noopener\">TEV \/ EBITDA<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Return on Equity in corporate finance equals a company\u2019s Net Income in a period, such as 1 year, divided by its average Shareholders\u2019 Equity over that same period; it measures a company\u2019s efficiency in generating after-tax profits based on its Common Equity, or its cumulative, saved-up after-tax earnings + capital issued to shareholders.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-29164","biws_kb","type-biws_kb","status-publish","hentry","kb_category-financial-statement-analysis"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/29164","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=29164"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}