Return on Equity Calculator

What is Return on Equity (ROE)?

Return on Equity (ROE) is a fundamental financial ratio that measures a company's profitability in relation to stockholders' equity. It indicates how efficiently a business is using shareholders' capital to generate net income and foster corporate growth.

How to Calculate Return on Equity

The basic formula for ROE is:

ROE (%) = (Net Income / Shareholder Equity) × 100

DuPont 3-Step Analysis Breakdown

To gain deeper insight into why ROE is high or low, investors use the DuPont 3-step model. This decomposes ROE into three core components:

Net Profit Margin: Net Income / Revenue (Operating efficiency)
Asset Turnover: Revenue / Total Assets (Asset usage efficiency)
Equity Multiplier: Total Assets / Shareholder Equity (Financial leverage)

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier

Comparing ROE with Related Metrics

While ROE measures returns on equity, comparing it with Return on Assets (ROA) and Return on Capital Employed (ROCE) reveals whether high returns are driven by operating performance or excessive debt financing.

Frequently Asked Questions

What is considered a good ROE?

An ROE of 15% to 20% is generally considered good for public companies. However, ideal ROE benchmarks vary significantly by industry sector.

Can ROE be negative?

Yes, if a company incurs a net loss, net income is negative, resulting in a negative ROE. Negative equity due to accumulated losses can also distort calculations.

How does debt affect ROE?

Higher debt increases the Equity Multiplier (financial leverage), which can artificially boost ROE even if profit margin and asset efficiency remain constant.

Report