This return on equity calculator computes ROE — net income ÷ average shareholders’ equity — and decomposes it the full DuPont way: profit margin × asset turnover × equity multiplier. ROE is the shareholder’s headline return, and also the easiest ratio in finance to inflate with borrowed money, which is exactly why the decomposition comes standard here.

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The Owner’s Number — and Its Favorite Illusion

ROE answers the shareholder’s question directly: for every dollar of equity capital in the business, how many cents of profit did the year produce? Its fame is deserved — sustained ROE above ~15% through a full cycle is the signature of a genuinely good business — and so is its notoriety: because equity is what’s left after debt, shrinking the equity (more debt, big buybacks) mechanically inflates the ratio without the business improving at all. The DuPont identity exists to catch this: ROE = margin × turnover × (assets/equity), and the third factor is pure leverage. When ROE rises, DuPont tells you whether the celebration belongs to the operators or to the treasurer’s borrowing.

Notice ROE uses average equity for the same reason ROA averages assets: income is a flow across the period; equity is a snapshot. This calculator averages the start and end balances you enter. Where equity is small, negative, or swinging (startups, post-buyback giants, distressed firms), the ratio degenerates — a company with negative equity and a loss reports a positive ROE, a piece of arithmetic nonsense the decomposition below the headline number helps you notice before quoting it.

Worked Example (Verified)

  • Net income $500k on revenue $5M, avg assets $5M, equity $1.9M → $2.1M (defaults): average equity $2.0M → ROE = 25.0%, decomposed as margin 10.0% × turnover 1.00× × multiplier 2.50×. The companion ROA is 10.0% — so 15 of the 25 points are the financing structure’s contribution: with zero debt this same business would post ROE = ROA = 10%.
  • The buyback mirage: repurchase $1M of equity and the same income on $1M average equity posts a 50% ROE with an identical business underneath — DuPont exposes it instantly (multiplier 5.0×). Markets often reward the headline anyway; the decomposition is your defense against applauding arithmetic.
  • The leverage cliff edge: at multiplier 2.5×, a bad year with ROA of −4% becomes ROE of roughly −10%; at multiplier 10× (a bank’s neighborhood) −4% ROA is a −40% equity event. Leverage is ROE’s volume knob in both directions.

Sustainable Growth: ROE’s Most Useful Trick

ROE powers the sustainable growth rate — the fastest a company can grow using only its own retained profits: g = ROE × (1 − dividend payout ratio). Our example firm at 25% ROE paying out 40% of earnings can self-fund growth of about 15% per year; growing faster than that requires new debt (multiplier rises), new equity (dilution), or better margins/turnover. Boards set dividend policy inside this identity, and analysts use its violation — growth persistently above g with flat leverage — to spot companies quietly consuming their balance sheets.

Reading ROE Like an Analyst

  • Compare ROE only within leverage-similar peer groups; a retailer’s 25% and a bank’s 12% are both “good” in their own physics.
  • Decompose every ROE change into its three DuPont factors before believing the narrative attached to it.
  • Distrust ROE when equity is tiny or negative — use ROA or ROIC there; the ratio’s denominator has left the meaningful range.
  • Five-year average ROE smooths the cycle; a single peak-year ROE is a marketing number.
  • Pair ROE with its source: high-ROE + falling multiplier (deleveraging while returns hold) is the strongest quality signal of the set.

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Frequently Asked Questions

How do you calculate return on equity?

ROE = net income ÷ average shareholders’ equity × 100. Average the opening and closing equity because income accrues across the period: ($1.9M + $2.1M)/2 = $2.0M here, and $500k/$2.0M = 25.0%. This calculator also produces the three-factor DuPont breakdown — net margin × asset turnover × equity multiplier — so the ROE’s sources are visible, not just its size.

What is a good ROE?

Sustained 15–20%+ through a full business cycle marks an excellent business in most sectors; 10–15% is solidly respectable; long-run market averages hover near low double digits. Context disciplines the judgment: banks earn praise at 10–12% (huge multipliers make more dangerous), utilities at ~10%, and asset-light compounders legitimately sustain 25%+. A single spectacular year proves little — durability across a downturn is the real test.

What is DuPont analysis?

The factoring of ROE into margin × turnover × leverage, developed at DuPont in the 1920s: ROE = (net income/revenue) × (revenue/assets) × (assets/equity). It converts one opaque ratio into three managerial stories — pricing/cost control, asset productivity, and financing. Extensions split margin further into tax burden, interest burden and operating margin (the five-factor model). This calculator’s results show the three-factor version with a plain-language verdict on the leverage term.

How can ROE be high while the business is mediocre?

Leverage and shrinkage. Because ROE divides by equity, a company can raise it by piling on debt (multiplier up) or buying back shares (equity down) while operations stagnate — the defaults here show a 10% ROA business displaying 25% ROE purely through a 2.5× multiplier. The defenses: always read ROE beside ROA, watch the multiplier’s trend, and check whether equity is being hollowed toward the zone where the ratio stops meaning anything.

What does negative equity do to ROE?

It breaks it. With negative equity, a profitable year yields a negative ROE and a loss produces a positive one — arithmetic artifacts, not information. Companies arrive there via accumulated losses or aggressive buybacks funded by debt (several famous restaurant and retail chains run negative book equity while operating fine). In that territory analysts switch to ROA, ROIC or cash-flow measures; never quote an ROE computed on a negative or near-zero denominator.

ROE or ROA — which should I use?

Both, in sequence. ROA judges the operating machine irrespective of financing; ROE judges the owners’ actual, leveraged experience. Comparing companies with different capital structures: lead with ROA (or ROIC). Evaluating what shareholders earned and what growth the firm can self-fund: ROE and the sustainable growth formula g = ROE × retention. The gap between the two ratios is itself a measurement — of how much of the return is borrowed.

What is the sustainable growth rate from ROE?

g = ROE × (1 − payout ratio): the growth rate a firm can fund from retained earnings without changing its leverage or issuing shares. At 25% ROE and a 40% payout, g = 15%. Growing faster consumes the balance sheet (more debt or new equity); growing slower while paying modest dividends means cash accumulates and ROE tends to sag under the idle equity — the pleasant problem of the mature compounder.

Is this return on equity calculator free?

Yes — free, instant, no sign-up. Net income, revenue, assets and equity balances return ROE with its complete DuPont decomposition.