Return on Equity (ROE) Calculator

Return on Equity is net income divided by shareholders' equity, expressed as a percent. It tells you how many cents of profit a company generates for every dollar of book equity that shareholders have left in the business. A 20 percent ROE means each dollar of equity produced 20 cents of net income over the period. Because the denominator is book equity (assets minus liabilities from the balance sheet), ROE blends operating performance, financing choices, and tax outcomes into a single ratio, which is why it sits near the top of the metrics list for stock analysts, lenders, and management compensation committees. Use trailing twelve-month net income against average equity (begin-of-period plus end-of-period divided by two) when comparing across companies; year-end snapshots can flatter or punish ROE in a year with a big buyback or capital raise.

DuPont decomposition was developed in the 1920s by F. Donaldson Brown at DuPont and refined at General Motors. It splits ROE into multiplicative drivers so you can see why ROE moved, not just that it did. The 3-factor version is ROE equals net profit margin (NI / Revenue) times asset turnover (Revenue / Total Assets) times equity multiplier (Total Assets / Equity). The 5-factor version extends that by splitting net profit margin into three sub-pieces: tax burden (NI / EBT), interest burden (EBT / EBIT), and EBIT margin (EBIT / Revenue). The 5-factor view is what equity analysts use to separate operating quality (EBIT margin, asset turnover) from financing quality (interest burden, equity multiplier) from tax outcomes (tax burden), which matters because two firms with the same 20 percent ROE can be running very different businesses: one earning it from operations, another from cheap leverage and a low tax rate.

A sustainable ROE is one a company can hold across a full business cycle without unusual leverage or one-time gains. Long-run S&P 500 ROE averages around 13 to 14 percent. Industry medians vary widely: software and consumer staples often run 25 to 35 percent on light asset bases, technology hardware and pharmaceuticals 20 to 25 percent, banks 10 to 15 percent (regulated leverage caps the top), regulated utilities around 9 to 11 percent (rate-of-return regulation), automakers and airlines often 5 to 10 percent in good years and negative in recessions. Always compare a company against its sector peers and against its own multi-year history, not against an absolute number. A 12 percent ROE is mediocre for a SaaS company and outstanding for a utility.

The equity multiplier (Total Assets / Equity) is one of the three DuPont factors. Hold operating performance constant and a company that funds itself with more debt and less equity automatically prints a higher ROE, because the same net income is divided by a smaller denominator. Lehman Brothers ran with equity multipliers above 30x before 2008, which produced impressive ROEs in good years and an unrecoverable wipeout in 2008. This is why ROE on its own is misleading: a 25 percent ROE built on a 5x equity multiplier (typical industrial) is fundamentally different from a 25 percent ROE built on a 20x equity multiplier (highly leveraged bank or hedge fund). Use ROA (Return on Assets) or ROIC (Return on Invested Capital) alongside ROE to strip out leverage and judge underlying operating quality. The 3-factor DuPont breakdown makes the leverage contribution explicit in the equity-multiplier column.

Buffett has repeatedly written, in Berkshire Hathaway annual letters going back to the 1970s, that long-run shareholder returns are bounded by the ROE a business can earn and reinvest. A business that compounds equity at 15 percent for two decades will roughly multiply book value sixteenfold, even before any multiple rerating. He looks for high ROE earned without unusual leverage (Coca-Cola, Moody's, See's Candies), held across multiple business cycles, and protected by a durable competitive advantage (brand, network effects, switching costs, scale). The 15 percent threshold is a rule of thumb, not a hard cutoff. The bigger filter is consistency: a company that prints 25 percent ROE one year and 5 percent the next is usually a cyclical or a one-trick pony, while a company that prints 18 to 22 percent every year for a decade is the kind of compounder that drives Berkshire's portfolio. Always check that ROE is earned operationally, not borrowed: a high ROE driven by a 4x or 5x equity multiplier is much riskier than the same ROE driven by margin and turnover.