The mean average of a firm’s outstanding shareholder’s equity over a number of averaging periods (usually five-month periods):
In general, this average is calculated by adding shareholders’ equity at the beginning of a time period to the shareholders’ equity at the end of that period, and averaging the total. Calculating average shareholders’ equity helps an analyst measures a company’s return on equity. For example, if a company has reported $3 million and $3.3 million in outstanding equity over a given year and a previous year, its average shareholders’ equity is then:
Average shareholders’ equity= (3 m+ 3.3 m)/ 2 = $3.15 m
Dividing the company’s net income (say $0.5 million) by the average shareholders’ equity will produce return on equity:
ROE= 0.5 m /3.15 m= 15.87%
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