# Calculating Returns On Equity, Beginning Equity, Investment, Invested Capital And Assets

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by: Eric Sprague

Financial websites vary in terms of how they calculate returns.

Unfortunately many of today's financial sites do not have adequate footnotes explaining background numbers for returns. The math is very simple once we see which numbers are being used. Hopefully by spelling things out here, it will help people understand the different numbers being reported in return ratios.

Numerator

Net earnings from the income statement are used as the numerator.

Denominator

Sites like forbes.com use the balance sheet from the current quarter.

Sites like morningstar.com, msn.com, fidelity.com and reuters.com average the current quarter against past data.

Examples

Let's go through some examples. We'll start out with Apple (NASDAQ:AAPL) because its calculations are straightforward. Having no long term debt, AAPL has few numbers to worry about. Also, at the time of this writing it is a clean break with their fiscal year that ended in September. We'll then move to McDonald's (NYSE:MCD) which has long term debt and has not filed its last quarter for the fiscal year at the time of this writing (this means we use trailing twelve months or ttm). Finally, we'll look at an older Berkshire Hathaway (NYSE:BRK.A) letter.

We're not comparing these companies as investments. Companies in different industries have different capital requirements and we're not doing things like comparing the ROA numbers in these examples for investment purposes.

1. What is the ROE for AAPL?

Forbes.com has 35.3% for ROE.

Numerator

2012 net earnings of 41.733 billion.

Denominator

2012 equity of 118.210 billion.

Calculation

41.733/118.210 = .3530 = 35.3%

Both morningstar.com and msn.com have 42.84% for ROE.

This is 2012 net earnings divided by the average of 2011 and 2012 equity.

Numerator

2012 net earnings of 41.733 billion.

Denominator

We know that 118.210b is 2012 equity and 76.615b is 2011 equity. (118.210 + 76.615)/2 = 97.41 for the denominator.

Calculation

41.733/97.41 = .4284 = 42.84%

Fidelity.com has 39.51% for ROE.

This is 2012 net earnings divided by the average equity from the last 4 quarters.

Numerator

2012 net earnings of 41.733 billion.

Denominator

We're using the average equity from the last 4 quarters or

(118,210.0 + 111,746.0 + 102,498.0 + 90,054.0)/4

which comes to 105,627.

Calculation

41.733/105.627 = .3951 = 39.51%

2. What is the ROI for AAPL?

Fidelity.com has 35.44% as the ROI for AAPL.

Numerator

2012 net earnings of 41.733 billion.

Denominator

We take the equity from the last 4 quarters: 118,210.0 + 111,746.0 + 102,498.0 + 90,054.0

which comes to 422,508

We take the deferred income tax from the last 4 quarters: 13,847.0 + 13,195.0 + 11,704.0 + 9,725.0

which comes to 48,471

We add these together and divide by 4: (422,508 + 48,471)/4 = 117,745

Note that AAPL has no long term debt. If it did then Fidelity would be adding it to this denominator (including the current portion).

Calculation

41.733/117.745 = .3544 = 35.44%

Let's also look at the Return on Investment (Most Recent Quarter, Annualized). Fidelity shows 24.91% here.

Numerator

2012 Q4 net earnings of 8.223 billion multiplied by 4 is 32.89.

Denominator

2012 Q4 equity of 118,210 + deferred income tax of 13,847 which comes to a total of 132,057.

Again, long term debt would be added to this denominator if it existed (including the current portion).

Calculation

32.89/132.057 = .2491 = 24.91%

Reuters shows 36.94% as the ROI for AAPL.

Numerator

2012 net earnings of 41.733 billion.

Denominator

We take the 2012 equity, deferred income tax and other liabilities: 118,210 + 13,847 + 5,465

which comes to 137,522

We take the 2011 equity, deferred income tax and other liabilities: 76,615 + 8,159 + 3,627

which comes to 88,401

We average 2012 and 2011: (137,522 + 88,401)/2 = 112,962

Long term debt would be included if it existed.

Calculation

41.733/112.962 = .3694 = 36.94%

3. What is the ROIC for AAPL?

It depends on whether we're using forbes.com or morningstar.com as the source. AAPL has no long term debt so we can see the background numbers by looking at the ROE calculations. Note that in the case of morningstar.com they use the current portion of long term debt as well.

4. What is the ROA for AAPL?

Forbes.com has 23.7% for ROA.

Numerator

2012 net earnings of 41.733 billion.

Denominator

2012 assets of 176.064 billion.

Calculation

41.733/176.064 = .2370 = 23.7%

Both morningstar.com and msn.com have 28.5% for ROA.

Numerator

2012 net earnings of 41.733 billion.

Denominator

We know that 2012 assets total 176.064 billion and 2011 assets total 116.371 billion. (176.064 + 116.371)/2 = 146.22

Calculation

41.733/146.22 = .2854 = 28.5%

Fidelity.com has 26.56% for ROA.

Numerator

2012 net earnings of 41.733 billion.

Denominator

We're averaging the asset total from the last 4 quarters which is

(176,064.0 + 162,896.0 + 150,934.0 + 138,681.0)/4

which comes to

157,144

Calculation

41.733/157.144 = .2656 = 26.56%

5. What is the ROE for MCD?

Forbes.com has 39.2%.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

2012 Q3 equity 13,884.1

Calculation

5,445.3/13,884.1 = .392 = 39.2%

Morningstar and msn.com have 40.01% for ttm.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

The average of 2012 Q3 equity + 2011 Q3 equity

= (13,884.1 + 13,338.2)/2

= 13,611.15

Calculation

5,445.3/13,611.15 = .40006 or 40.01%

Fidelity.com has 38.23%

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

Equity from (2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4)/4

= (13,884.1 + 14,035.1 + 14,660.5 + 14,390.2)/4

= 14,242.48

Calculation

5,445.3/14,242.48 = .3823 = 38.23%

6. What is the ROI for MCD?

Fidelity.com has 18.99% as the ROI ttm.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

We average the following from the last 4 quarters:

Current Portion of Long Term Debt

Total Long Term Debt

Deferred Income Tax

Total Equity

Current Portion of Long Term Debt (2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4)/4

= (512.1 + 852.9 + 724.2 + 366.6)/4

= 2,455.8/4

= 613.95

Total Long Term Debt (2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4)/4

= (12,752 + 12,720.4 + 12,055.7 + 12,133.8)/4

= 49,666.9/4

= 12,416.725

Deferred Income Tax (2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4)/4

= (1,480 + 1,406.5 + 1,396.2 + 1,344.1)/4

= 5,626.8/4

= 1,406.7

Total Equity (2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4)/4

= (13,884.1 + 14,035.1 + 14,660.5 + 14,390.2)/4

= 56,969.9/4

= 14,242.475

Our denominator is the sum of these 4 parts

= 613.95 + 12,416.725 + 1,406.7 + 14,242.475

= 28,679.85

Calculation

5,445.3/28,679.85 = .18986 = 18.99%

Reuters.com has 19.15% for ROI ttm.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

We average the following from Q3 2012 and Q3 2011:

Total Long Term Debt

Deferred Income Tax

Other Liabilities

Total Equity

Total Long Term Debt (2012 Q3 + 2011 Q3)/2

= (12,752 + 10,988.1)/2

= 23,740.1/2

= 11,870.05

Deferred Income Tax (2012 Q3 + 2011 Q3)/2

= (1,480 + 1,352.2)/2

= 2,832.2/2

= 1,416.10

Other Liabilities (2012 Q3 + 2011 Q3)/2

= (1,557.1 + 1,520.8)/2

= 3,077.9/2

= 1,538.95

Total Equity (2012 Q3 + 2011 Q3)/2

= (13,884.1 + 13,338.2)/2

= 27,222.3/2

= 13,611.15

Our denominator is the sum of these parts

= 11,870.05 + 1,416.10 + 1,538.95 + 13,611.15

= 28,436.25

Calculation

5,445.3/28,436.25 = .19149 = 19.15%

7. What is the ROIC for MCD?

Forbes has 20.4% as the return on invested capital.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

We're adding the 2012 Q3 equity and the 2012 Q3 long term debt

= 13,884.1 + 12,752

= 26,636.1

Calculation

5,445.3/26,636.1 = .204 = 20.4%

Morningstar.com has 20.54% for Return on Invested Capital ttm.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

We're averaging equity and long term debt (including current portion) and Notes Payable/Short Term Debt from 2012 Q3 and 2011 Q3.

Total Equity (2012 Q3 + 2011 Q3)/2

= (13,884.1 + 13,338.2)/2

= 27,222.3/2

= 13,611.15

Notes Payable/Short Term Debt (2012 Q3 + 2011 Q3)/2

= (0 + 816.1)/2

= 408.05

Current Portion of Long Term Debt (2012 Q3 + 2011 Q3)/2

= (512.1 + 725.4)/2

= 1,237.5/2

= 618.75

Total Long Term Debt (2012 Q3 + 2011 Q3)/2

= (12,752 + 10,988.1)/2

= 23,740.1/2

= 11,870.05

This brings us to 13,611.15 + 408.05 + 618.75 + 11,870.05 = 26,508

Calculation

5,445.3/26,508 = .2054 = 20.54%

8. What is the ROA for MCD?

Forbes has 16.1%.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

2012 Q3 total assets 33,824.5

Calculation

5,445.3/33,824.5 = .1609 = 16.1%

Morningstar.com and msn.com have 16.5% ttm as the MCD ROA.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

The average of 2012 Q3 assets + 2011 Q3 assets

= (33,824.5 + 32,277.5)/2

= 33,051

Calculation

5,445.3/33,051 = .1647 = 16.5%

Fidelity.com has 16.32% as the MCD ROA ttm.

Numerator

Net earnings from 2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4

= 1,455 + 1,347 + 1,266.7 + 1,376.6

= 5,445.3

Denominator

Assets from (2012 Q3 + 2012 Q2 + 2012 Q1 + 2011 Q4)/4

= (33,824.5 + 33,332.4 + 33,334.2 + 32,989.9)/4

= 133,481/4

= 33,370.25

Calculation

5,445.3/33,370.25 = .16317 = 16.32%

9. How does Warren Buffett measure returns?

This is from the BRK.A 1980 letter to shareholders:

Operating earnings improved to \$41.9 million in 1980 from

\$36.0 million in 1979, but return on beginning equity capital

(with securities valued at cost) fell to 17.8% from 18.6%.

Let's look at the 17.8% return on beginning equity capital number.

Numerator

The numerator is easy, it is the 41.9 million operating earnings mentioned from 1980.

Denominator

The "beginning equity capital" phrase means we're looking back a year at the 1979 balance sheet. The "with securities valued at cost" phrase means we're not including unrealized equity appreciation.

Let's look at the 1979 balance sheet (in thousands):

892,265 assets

547,303 liabilities

344,962 total shareholders' equity

Be sure to look at the second column of numbers (1979) in this screen shot.

Again, we don't just use the total equity number as the denominator. We subtract the line below:

108,913 unrealized appreciation of marketable equity securities,

net of provision for deemed applicable income taxes

344,962 minus 108,913 equals 236,049.

Converting to millions, our denominator is 236.049

Calculation

41.9/236.049 = .1775 or 17.8%

Conclusion

This article demonstrates how financial websites vary in terms of calculating returns. Comparing stocks based on returns is outside the scope of this article. For example, different industries do not have the same capital requirements so looking at the ROA for stocks in different industries is like comparing apples and oranges. ROE has limitations as well like being sensitive to long term debt.

These examples help show that just because financial sites have different numbers doesn't mean they are right or wrong. They simply use different assumptions in their calculations.

Disclosure: I am long AAPL, MCD, BRK.A, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Any material in this article should not be relied on as a formal investment recommendation.