Quick answer
ROE = Net Income / Shareholders' Equity × 100. Example: $10M net income ÷ $50M equity = 20% ROE. An ROE above 15% is generally considered strong; the S&P 500 average is ~14–17%.
How to use this calculator
Enter Net Income (from the income statement — the bottom line after all expenses and taxes) and Shareholders' Equity (from the balance sheet: total assets minus total liabilities). For greater accuracy, use the average equity for the period: (beginning equity + ending equity) / 2. The calculator shows ROE as a percentage.
Optionally complete the DuPont decomposition by entering Net Profit Margin (%), Asset Turnover, and Equity Multiplier to understand the three drivers of ROE.
Return on Equity formula
ROE measures the profitability generated on each dollar of equity capital:
$$\text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \times 100$$
Where:
- Net Income = profit after interest, taxes, and all expenses
- Shareholders' Equity = total assets − total liabilities (book value of equity)
Best practice is to use the average shareholders' equity for the period to account for equity changes (new shares issued, dividends paid, buybacks executed) during the year: Average Equity = (Beginning Equity + Ending Equity) / 2.
DuPont analysis — decomposing ROE
The DuPont framework breaks ROE into three components, each measuring a different dimension of performance:
$$\text{ROE} = \underbrace{\frac{\text{Net Income}}{\text{Revenue}}}_{\text{Net Profit Margin}} \times \underbrace{\frac{\text{Revenue}}{\text{Total Assets}}}_{\text{Asset Turnover}} \times \underbrace{\frac{\text{Total Assets}}{\text{Equity}}}_{\text{Equity Multiplier}}$$
| Component | Formula | What it measures | Improved by |
|---|---|---|---|
| Net Profit Margin | Net Income / Revenue | Profitability per dollar of revenue | Pricing power, cost reduction |
| Asset Turnover | Revenue / Total Assets | Efficiency of asset use | Higher revenue with same assets; leaner asset base |
| Equity Multiplier | Total Assets / Equity | Financial leverage | Taking on more debt (increases ROE but also risk) |
DuPont analysis reveals whether high ROE is driven by genuine operational excellence (high margins, efficient assets) or financial engineering (high leverage). Two companies with 20% ROE can be very different businesses: one with 10% margin, 1.0x turnover, 2.0x leverage vs. another with 5% margin, 0.8x turnover, 5.0x leverage — the second is far riskier.
Worked examples
| Company | Net Income | Equity | ROE | Net Margin | Asset Turnover | Equity Multiplier |
|---|---|---|---|---|---|---|
| SaaS company | $20M | $80M | 25% | 20% | 1.25x | 1.0x |
| Consumer brand | $500M | $2,000M | 25% | 15% | 1.2x | 1.4x |
| Bank | $1,000M | $8,000M | 12.5% | 25% | 0.05x | 10x |
| Retailer | $150M | $600M | 25% | 3% | 2.5x | 3.3x |
All four companies show 25% or similar ROE, but the DuPont drivers are completely different. The SaaS company achieves it with margins and no leverage; the bank uses extreme leverage; the retailer uses high asset turnover and moderate leverage.
ROE benchmarks by industry
| Industry | Typical ROE | Primary ROE driver |
|---|---|---|
| Software / SaaS | 20% – 50%+ | High net profit margins |
| Consumer Brands | 20% – 40% | Margins + moderate leverage |
| Healthcare / Pharma | 15% – 30% | Margins + IP pricing power |
| Financial Services | 10% – 18% | Financial leverage (high multiplier) |
| Industrials | 10% – 18% | Asset turnover + moderate margins |
| Utilities | 8% – 14% | Leverage (regulated, stable) |
| Retail | 12% – 22% | Asset turnover + leverage |
ROE vs. ROA vs. ROCE
These three return metrics each measure capital efficiency from a different angle:
$$\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \times 100$$
$$\text{ROCE} = \frac{\text{EBIT}}{\text{Capital Employed}} \times 100$$
| Metric | Denominator | Affected by leverage | Best used for |
|---|---|---|---|
| ROE | Shareholders' equity | Yes — leverage amplifies ROE | Equity investors; management effectiveness |
| ROA | Total assets | No — uses total assets (debt + equity) | Comparing asset efficiency across companies |
| ROCE | Capital employed (equity + long-term debt) | Partially | Capital-intensive businesses; long-term allocation |
A large gap between ROE and ROA indicates heavy use of financial leverage — the equity multiplier is inflating ROE. For companies with comparable leverage, ROE differences reflect genuine operational quality. When comparing highly leveraged companies (banks, utilities) use ROA or ROCE for a fairer comparison.
Frequently asked questions
What is Return on Equity?
ROE measures how much profit a company generates per dollar of shareholders' equity: ROE = Net Income / Shareholders' Equity × 100. It is one of the core profitability metrics used by investors to assess management's ability to allocate capital effectively.
What is a good ROE?
ROE above 15% is generally strong. Warren Buffett consistently highlights ROE above 15% as a hallmark of a quality business. The S&P 500 long-run average is ~14–17%. Asset-light businesses (software, brands) can sustain 30–50%+ ROE; capital-intensive industries naturally run lower. Always compare within the same industry.
What is DuPont analysis?
DuPont breaks ROE into three components: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier. It shows whether ROE comes from profitability (margin), efficiency (asset turnover), or leverage (equity multiplier). High ROE from margins and turnover is sustainable; high ROE from leverage is riskier and cyclically vulnerable.
Can ROE be too high?
Yes. Very high ROE can result from excessive debt (inflated equity multiplier), heavy share buybacks (reduced equity base), or one-time income events — none of which represent sustainable operational quality. Check DuPont components: if equity multiplier is above 3–4x, the high ROE is largely leverage-driven.
What is the difference between ROE and ROA?
ROE uses equity as the denominator; ROA uses total assets. Because assets = equity + debt, ROA is not affected by how the company is financed. ROE rises when leverage increases; ROA stays the same. The difference between a company's ROE and ROA reflects the impact of financial leverage. ROA is better for comparing companies with different debt levels.