In financial investment, calculating returns from equity is one of the key factors that helps investors evaluate the effectiveness of investments in stocks and similar assets. Formulas for calculating returns from equity not only help investors evaluate the growth of assets but also reflect the level of success in optimizing investment capital. In this article, we will learn about popular formulas for calculating returns from equity and how to apply them in practice.
1. CALCULATE RETURN ON EQUITY
One of the most basic formulas in calculating returns from equity is the formula for calculating returns from equity. Returns from equity help investors know the rate of return earned from changes in stock value after a certain period of time.
The formula for calculating return on equity is:
Return on Equity
=
Initial Value of Shares
ˆ
ˊ
u
−Initial Value of Shares
ˆ
ˊ
u
Initial Value of Shares
ˆ
ˊ
u
×
100
Return on Equity=
Initial Value of Shares
ˆ
ˊ
u
−Initial Value of Shares
ˆ
ˊ
u
×
100
Return on Equity=
Initial Value of Shares
ˆ
ˊ
u
−Initial Value of Shares
ˆ
ˊ
u
−100
end value
ˊ
i c
u
ˋ
ng of the stock
e
ˆ
ˊ
u−Initial value
ˊ
u of the stock
e
ˆ
ˊ
u
×100
Where:
The final value of the stock is the price of the stock at the time you sell it or the current value of the stock.
The initial value of the stock is the price you bought the stock for.
This formula helps you calculate the growth rate of the stock’s value over the time you hold it. The result of the formula will be a percentage, showing the profit you have earned from your initial investment.
For example, if you buy a stock for VND100,000 and sell it for VND120,000, the return on equity is:
Return on Equity
=
120,000
−
100,000
100,000
×
100
=
20
%
Return on Equity=
100,000
120,000−100,000
×100=20%
This means you have earned a 20% return on your stock.
2. DIVIDEND YIELD
Dividend yield is another formula used to calculate the return from receiving dividends when holding stocks. Dividends are the money that companies pay to shareholders from their profits, and this is an important factor that helps investors create a steady income stream from stocks.
The formula for calculating dividend yield is:
Dividend Yield
=
Dividend h
a
ˋ
ng n
a
˘
m
Current Price of Stocks
×
100
Dividend Yield=
Current Price of Stocks
×
100
Dividend Yield=
Current Price of Stocks
×
100
Where:
Annual dividend is the amount the company pays per share in a year.
Current stock price is the market price of the stock at the time you buy it.
This formula helps investors determine the rate of return from dividends they receive over the time they hold the stock.
For example, if you receive a dividend of VND 5,000 per year from a stock worth VND 100,000, your dividend yield will be:
Dividend Yield
=
5,000
100,000
×
100
=
5
%
Dividend Yield=
100,000
5,000
×100=5%
This means that you receive a 5% annual dividend return on the amount you spent to buy the stock.
3. CALCULATE TOTAL RETURN
When investing in equity, in addition to the profit from the change in stock value, investors can also receive dividends, so the total return from equity needs to take into account both of these factors. The total return formula helps to fully assess the level of profit you can receive from an investment.
The formula for calculating general return is:
Total Return
=
Initial Value
ˊ
of Shares
ˆ
ˊ
u
+
Dividends Received
−
Initial Value
ˊ
of Shares
ˆ
ˊ
u
Initial Value
ˊ
of Shares
ˆ
ˊ
u
×
100
Total Return=
Initial Value
ˊ
of Shares
ˆ
ˊ
u
Cumulative Value
o
ˆ
ˊ
i c
u
ˋ
ng of the stock
e
ˆ
ˊ
u+Dividends received−Initial value
a
ˊ
ˋ
u of the stock
e
ˆ
ˊ
u
×100
Where:
The final value of the stock is the price of the stock at the time you sell.
Dividends received is the total amount of dividends you have received since owning the stock.
The initial value of the stock is the price you bought the stock for.
This formula helps you calculate the overall return from both the growth in the stock’s value and the dividends.
For example, if you buy a stock for VND100,000, sell it for VND120,000, and receive a dividend of VND5,000 during your holding period, the total return on this investment is:
Total Return
=
120,000
+
5,000
−
100,000
100,000
×
100
=
25
%
Total Return=
100,000
120,000+5,000−100,000
×100=25%
This means that you earn 25% of your return from both the stock growth and the dividend.
4. RETURN ON EQUITY (ROE)
The Return on Equity (ROE) is an important indicator that investors use to evaluate a company’s efficiency in using equity to generate profits. The higher the ROE, the more effective the company is in generating profits from the capital invested by shareholders.
The formula for calculating ROE is:
𝑅
𝑂
𝐸
=
Profit r
o
ˋ
ng
V
o
ˆ
ˊ
n owners
×
100
ROE=
V
o
ˆ
ˊ
n owners
Profit r
o
ˋ
ng
×100
Where:
Net profit is the profit after tax that the company generates in a period.
Equity is the total amount of money that shareholders have invested in the company, including shares and retained earnings.
ROE is a useful tool for investors to evaluate the profitability of a company. This index can also help investors decide whether to invest in that company’s stock or not.
5. MARGIN RETURN
Another important formula for calculating equity returns is margin return. When using margin, investors borrow money from a brokerage firm to buy stocks. Margin increases the potential for profit, but also comes with higher risks. The formula for calculating margin profit is:
Margin Return
=
Profit from
ˋ
ng from a
ˆ
ˋ
u tử
S
o
ˆ
ˊ
tie
ˆ
ˋ
n vay mửn
Lưu
r
ˋ
ng from a
ˆ
ˋ
u tử
×
100
Margin Return=
S
o
ˆ
ˊ
tie
ˆ
ˋ
n vay mửn
Profit from
ˋ
ng from a
ˆ
ˋ
u tử
×100
Using margin can help investors increase profits if the stock price increases, but if the stock price decreases, investors will have to bear greater losses. Therefore, the strategy of using margin requires a clear understanding of the market and the ability to control risks.
CONCLUSION
Calculating returns from equity is an indispensable part of evaluating investment efficiency. The formulas for calculating returns from equity, dividends, total profits, ROE and margin return all help investors have a more comprehensive and detailed view of the financial efficiency of investments in stocks. When applying these formulas correctly, investors will be able to optimize profits and minimize risks in equity investments.
