ROE Calculator
Calculate Return on Equity (ROE) — how much profit a business generates for every dollar of shareholders' equity. ROE is the single most-watched profitability metric by investors because it measures what shareholders actually earn on their investment.
What Is Return on Equity?
Return on Equity (ROE) measures how much profit a business generates for every dollar of shareholders' equity. It answers a simple question: for every $100 of equity invested, how many dollars of profit does the business earn per year?
ROE is what investors actually care about — it is the return on the capital they have put into the business. A high ROE means the business is efficient at converting equity into profit. A low ROE means the business is not delivering enough return to justify the equity invested.
ROE Formula
ROE = (Net Income ÷ Shareholders' Equity) × 100
ROE can also be decomposed using the three-step DuPont formula:
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
This decomposition shows that a company can achieve a high ROE in three different ways: high profitability (margin), high efficiency (turnover), or high leverage (equity multiplier). All three are legitimate, but leverage-driven ROE carries more risk.
Worked Example
A business has $75,000 in net income and $400,000 in shareholders' equity:
ROE = ($75,000 ÷ $400,000) × 100 = 18.75%
For every $100 of equity, the business earns $18.75 of net profit per year.
If the industry average is 15%, this business is above average. If the risk-free rate is 5%, the business is generating 13.75% above a safe return — a healthy risk premium.
How to Interpret ROE
- Above 20% (Excellent) — very strong. Common in software, financial services, and asset-light businesses.
- 15–20% (Good) — above average. Healthy return to shareholders.
- 10–15% (Average) — typical for mature businesses.
- Below 10% (Weak) — the business is not earning enough on equity to justify the risk.
- Below the risk-free rate (Poor) — shareholders would do better buying government bonds.
- Negative ROE — the business is losing money. Immediate investigation needed.
Frequently Asked Questions
What is a good ROE?
A ROE of 15–20% is generally considered good. Above 20% is excellent. Below 10% is weak. The S&P 500 average ROE has historically been 14–18%. Compare against the industry — banks typically run 10–15%, software 20–30%, utilities 8–12%. Always compare within the same industry.
What is the difference between ROE and ROA?
ROA measures profit relative to total assets — it ignores how the business is funded. ROE measures profit relative to equity — it rewards debt financing. ROE is always equal to or higher than ROA when the business has debt, because debt magnifies returns to equity. ROA is the cleaner efficiency metric; ROE shows what shareholders actually earn.
Why can ROE be misleading?
A high ROE can come from high debt, not high profitability. A company with low net income but very low equity (because of heavy debt) will show a high ROE even though the business is risky. Always check ROE alongside ROA, the debt-to-equity ratio, and cash flow to see whether the return is real or leverage-driven.
What is the DuPont analysis?
DuPont analysis breaks ROE into three components: net profit margin (how much profit per dollar of sales), asset turnover (how much sales per dollar of assets), and equity multiplier (how much assets per dollar of equity). This shows whether a company's ROE comes from profitability, efficiency, or leverage.
Can ROE be negative?
Yes. Negative ROE means the business is generating a net loss. If both net income and equity are negative, ROE can technically be positive — but that is a meaningless result because the business is insolvent. Negative equity combined with negative income means the business is deeply distressed.
How do I improve ROE?
Three DuPont levers: increase net profit margin (raise prices, cut costs), increase asset turnover (generate more sales per dollar of assets), or increase the equity multiplier (use more debt — not recommended as a long-term strategy). The most sustainable improvements come from higher margin and better asset efficiency, not from leverage.