Return on Equity (ROE) Calculator

The Return on Equity (ROE) Calculator measures the profitability of a company relative to its shareholders' equity, making it the single most important metric for equity investors. ROE answers the crucial question: for every dollar shareholders have invested, how many cents of profit does the company generate? Warren Buffett famously uses ROE as a primary criterion for investment selection, favoring companies with consistently high ROE above 15%.

ROE is calculated as Net Income / Shareholders' Equity × 100. A company with $200,000 in net income and $800,000 in equity has a 25% ROE, meaning it generates a 25% return on the capital its shareholders have invested. This metric directly connects to shareholder value creation — companies that consistently earn returns above their cost of equity are creating wealth for shareholders.

This calculator also performs a full DuPont decomposition, breaking ROE into three component drivers: Net Profit Margin × Asset Turnover × Equity Multiplier. This powerful framework reveals the source of a company's ROE. A luxury brand might achieve high ROE through exceptional margins (30%+), while a discount retailer achieves it through rapid asset turnover. A utility might rely on leverage (high equity multiplier). Understanding which lever drives ROE is critical for evaluating sustainability and risk.

High ROE is not always positive. If ROE is driven primarily by excessive leverage (a high equity multiplier), the returns come with elevated financial risk. A company with modest margins and turnover but extreme leverage might show a high ROE that collapses during an economic downturn. The DuPont breakdown helps investors distinguish between sustainable ROE (driven by margins and efficiency) and leveraged ROE (driven by debt).

Industry benchmarks for ROE vary widely. Technology companies often achieve 20-40% ROE, consumer staples 15-25%, financials 10-15%, and utilities 8-12%. A company consistently delivering ROE above its industry average is creating competitive advantage. Conversely, ROE persistently below the cost of equity (typically 8-12%) indicates the company is destroying shareholder value.