Return on Equity Calculator
Calculate Return on Equity (ROE) to measure how effectively a company generates profits from shareholders' equity. ROE is one of the most important profitability ratios for assessing management efficiency and shareholder value creation.
Financial Metrics
ROE Results
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Profitability Analysis
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Understanding Return on Equity
Return on Equity (ROE) measures how effectively a company generates profits from shareholders' equity. It's considered one of the most important financial ratios because it shows how well management is using the money invested by shareholders to generate earnings growth.
ROE Formula
Basic Formula
- ROE = Net Income / Shareholders' Equity
- Expressed as a percentage
- Shows profit per dollar of equity
- Key profitability metric
DuPont Analysis
- ROE = Profit Margin × Asset Turnover × Equity Multiplier
- ROE = (Net Income/Sales) × (Sales/Assets) × (Assets/Equity)
- Breaks down ROE drivers
- Comprehensive analysis tool
ROE Interpretation
Performance Benchmarks
Industry ROE ranges and interpretations
Excellent ROE (20%+)
- Superior profitability
- Excellent management
- Strong competitive advantage
- High shareholder returns
Good ROE (15-20%)
- Above average performance
- Efficient operations
- Good market position
- Attractive investment
Average ROE (10-15%)
- Market average performance
- Competent management
- Stable operations
- Fair investment option
Below Average ROE (<10%)
- Poor profitability
- Inefficient operations
- Competitive challenges
- Requires improvement
ROE Components Analysis
| Component | Formula | What It Measures | Improvement Strategies |
|---|---|---|---|
| Profit Margin | Net Income / Sales | Pricing power and cost control | Increase prices, reduce costs |
| Asset Turnover | Sales / Assets | Asset utilization efficiency | Improve inventory turnover, increase sales |
| Equity Multiplier | Assets / Equity | Financial leverage | Strategic debt usage |
ROE vs Other Returns
vs Return on Assets (ROA)
- ROE focuses on equity efficiency
- ROA measures total asset efficiency
- ROE affected by leverage
- ROA shows operating efficiency
vs Return on Capital (ROC)
- ROE uses shareholders' equity
- ROC includes debt and equity
- ROE shows equity returns
- ROC measures total capital returns
Industry Variations
High ROE Industries
- Technology (20-30%)
- Consumer discretionary
- Financial services
- High growth sectors
Low ROE Industries
- Utilities (8-12%)
- Capital intensive industries
- Regulated businesses
- Mature sectors
ROE Limitations
Accounting Issues
- Affected by accounting policies
- Share buybacks inflate ROE
- One-time gains distort results
- Quality of earnings matters
Context Missing
- No risk adjustment
- Ignores capital structure
- Short-term focus possible
- Industry comparisons needed
Key Takeaways for Return on Equity
- ROE = Net Income / Shareholders' Equity measures how effectively a company generates profits from equity capital
- Higher ROE indicates better management efficiency and shareholder value creation
- ROE can be decomposed using DuPont analysis into profit margin, asset turnover, and leverage
- Compare ROE within the same industry and against historical company performance
- Sustainable ROE above 15% is generally considered excellent
- ROE should be analyzed alongside other metrics like ROA and debt levels
- Quality of earnings and sustainability of ROE are crucial considerations
- ROE drives stock price performance and is a key metric for value investors