ROE (Return on Equity)
Definition
A measure of financial performance: net income divided by shareholders' equity, showing how effectively a company generates profits from equity capital.
Why is ROE (Return on Equity) Important?
ROE (Return on Equity) is a critical concept in corporate finance, business analysis, and investment decision-making. Whether you are evaluating a company's performance, assessing an investment opportunity, or running your own business, understanding this metric helps you make data-driven decisions that maximize returns and minimize risk.
Our business calculators provide instant computations for this metric, empowering entrepreneurs, analysts, and investors to evaluate financial health and make strategic decisions with confidence.
What is ROE (Return on Equity)?
Return on Equity (ROE) measures how effectively a company uses shareholders' equity to generate profit. It tells investors how much profit is generated for every dollar of equity invested.
Formula
ROE = (Net Income / Shareholders' Equity) ร 100
ROE Benchmarks
| ROE Range | Assessment |
|---|---|
| > 20% | Excellent โ strong value creation |
| 15โ20% | Good performance |
| 10โ15% | Average |
| 5โ10% | Below average |
| < 5% | Poor โ may not be creating value above cost of equity |
DuPont Analysis (ROE Breakdown)
ROE = Net Margin ร Asset Turnover ร Equity Multiplier
| Component | Formula | What It Measures |
|---|---|---|
| Net Margin | Net Income / Revenue | Profitability |
| Asset Turnover | Revenue / Total Assets | Efficiency |
| Equity Multiplier | Total Assets / Equity | Leverage |