📊 ROE Calculator

Return on equity divides net income by average shareholder equity. With $480,000 of profit on $3.1 million average equity, ROE is 15.48 percent. The DuPont breakdown shows where it came from: 9.23 percent net margin x 0.85x asset turnover x 1.97x assets-to-equity = 15.48 percent. Same ROE, three very different stories depending on which leg does the work.

ROE is the shareholder’s bottom line: what did my capital earn? But debt flatters it, which is why the DuPont split matters. Fifteen percent ROE from margin and turnover is quality; fifteen percent from 4x assets-to-equity is fragility wearing a nice number.

How to Use This Calculator

Enter net income, beginning and ending equity, plus revenue and average assets for the DuPont split. The calculator returns ROE and decomposes it into margin, turnover, and debt impact.

The ROE and DuPont Formulas

The three factors multiply exactly to ROE: margin measures pricing power, turnover measures asset efficiency, the equity multiplier measures financial risk-taking. Improving any leg raises ROE, but they are not equal in quality. Margin-led ROE is the most durable; debt-led is the most dangerous.

Warren Buffett’s famous preference for high ROE businesses comes with the qualifier he always adds: achieved with little debt. The DuPont analysis is how you check whether the qualifier holds.

Worked Example

$480,000 net income, $2.8M to $3.4M equity (avg $3.1M), $5.2M revenue, $6.1M average assets. ROE = $480,000 / $3,100,000 = 15.48 percent. Margin = 9.23%, turnover = 0.85x, equity multiplier = 1.97x. Check: 0.0923 x 0.85 x 1.97 = 15.48 percent.

Contrast: a rival posts 18 percent ROE from 4 percent margin, 1.1x turnover, and 4.1x assets-to-equity. Higher ROE, worse business: thin margins on heavy debt. When rates rise or sales dip, the debt-heavy rival’s ROE collapses while the first company’s holds. Our ROA calculator strips debt out for the clean comparison.

ROE Benchmarks and Traps

Buybacks flatter ROE by shrinking the denominator: a company can raise ROE for years while the business stagnates, purely by retiring shares. Check ROE against return on invested capital and absolute profit growth; if ROE rises while profits flatline, financial engineering is doing the work. Also watch for negative equity from accumulated losses, which makes ROE mathematically meaningless.

Using ROE in Decisions

Investors should demand ROE sustainably above the cost of equity, roughly 8 to 10 percent for most markets; below that, the company destroys shareholder value no matter how fast it grows. Managers should test projects against it too: reinvesting retained earnings at 15 percent ROE compounds beautifully, which our retention ratio calculator quantifies. But never use ROE alone to pick stocks; pair it with ROIC to confirm the operations earn it, not merely the borrowing.

The Buffett Test: Consistency Over Spikes

One year of 20 percent ROE proves little; ten years proves a franchise. The durable pattern is ROE above 15 percent with debt-to-equity under 0.5, repeated across cycles: pricing power doing the work, not borrowing. Spikes from one-time gains, tax benefits, or asset sales should be stripped out before judging. Look at the median across a decade, not the latest print.

Then ask why it persists. Answers that count: brands customers pay extra for, network effects, switching costs, patents, scale economies. Answers that do not: a hot cycle, an underinvested asset base, financial engineering. The moat explains the persistence; without one, high ROE mean-reverts as competitors arrive. This is qualitative work no calculator does, but the calculator tells you where to look: at the companies whose ROE refuses to fall.

ROE Traps for Beginners

Every trap has the same defense: look at multi-year averages, decompose with DuPont, and ask what would have to be true for the ROE to persist. Beginners see 25 percent ROE and buy; professionals see 25 percent ROE and investigate. The investigation usually takes an hour and saves years of regret. Make it a habit: no investment on a single ratio, ever.

ROE and the Cost of Equity

ROE only creates value above the cost of equity: the return shareholders demand for the risk. A company earning 12 percent ROE with a 10 percent cost of equity creates value; at 14 percent cost of equity it destroys it, however impressive the 12 looks. Estimate cost of equity with CAPM or a build-up method, and demand the spread. Growth at below-cost ROE is just expensive motion.

This is why regulated utilities can be fine investments at 10 percent ROE: their risk is low, so their cost of equity is low, and the spread is positive. And why a tech company at 15 percent ROE can be mediocre if its risk demands 16. Absolute ROE impresses; ROE minus cost of equity decides. Always subtract before admiring.

Estimates for planning only, not financial advice.