Return on equity, or ROE, is a company's net income divided by its average shareholders' equity over the same year. It answers a simple question: for every dollar the owners have put into the business (or left in it as retained profit), how many cents of profit did the company make this year? The DuPont breakdown splits ROE into three parts: net profit margin times asset turnover times financial leverage, so you can see whether a high figure comes from real profitability, from selling a lot per dollar of assets, or just from borrowing.
Worked example
Company A has equity of $48 million at the start of the year and $52 million at the end, so average equity is ($48 million + $52 million) ÷ 2 = $50 million. Its net income is $10 million. ROE = $10 million ÷ $50 million = 0.20 = 20%. DuPont check: sales of $100 million give a net margin of $10 million ÷ $100 million = 10%; total assets of $100 million give an asset turnover of $100 million ÷ $100 million = 1.0; and assets of $100 million over equity of $50 million give a leverage factor of 2.0. Then 10% × 1.0 × 2.0 = 20%, the same answer. With no borrowing at all (leverage factor 1.0) the same company would show an ROE of 10%, so half of this 20% comes from borrowed money doing part of the work.
Why it matters
ROE shows how well a business turns its owners' money into profit, so it is one of the first numbers to look at when judging performance. A steady ROE over many years is more informative than one good year. The usual traps: share buybacks shrink the equity in the denominator, and heavy borrowing means the profit sits on a thin layer of equity, so either can push ROE up without the business getting any better, a loss combined with negative equity can produce a misleading positive figure, and one-off gains can inflate the profit on top. Banks, software firms and heavy industry sit at very different levels, so compare within the same industry. A high or low ROE is a question to look into, not a verdict on the company.
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Frequently asked questions
ROE = net income ÷ average shareholders' equity. Add the equity at the start and at the end of the year, divide by two, and divide the year's net income by that figure. Some sources use year-end equity only, which is simpler but less exact when equity changes a lot during the year.
Not by itself. A high ROE can come from real profitability, but also from heavy borrowing, share buybacks that shrink equity, or a one-off gain. Compare it with the company's debt level and with its own earlier years before drawing any conclusion.
ROE divides net income by the owners' equity. ROA (return on assets) divides net income by total assets, so debt-funded assets count too. ROIC (return on invested capital) divides operating profit after tax by the equity plus debt put into the business. The gap between ROE and ROA is largely the effect of leverage.
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Built & maintained by Worthmap · Last updated November 1, 2026
Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.