Morningstar calculates the average return on equity of the industry in which a company operates, and assigns a percentile rank to the company depending on how it compares with the industry average. Companies are ranked on a scale of 1 to 100, with 1 representing those companies with the highest ROEs and 100 those with the lowest.
Benefit
This statistic enables users to gauge a company's return on equity against those of its industry peers.
Origin
This is calculated in-house by arranging in ascending order, the ROE of the company relative to all other companies in the industry.
For the Pros
At any given time, some industries will be doing well, and some will be doing poorly. As a result, ROEs will vary quite a bit from industry to industry. By comparing companies with their peers, the ROE percentile rank helps better assess a company’s ROE.
Use the following formula to find companies that have dramatically improved their ROEs. The same equation can be used on ROA:
((ROE Year 1 – ROE Year 5) / ROE Year 5) x 100