Return on Equity Calculator: Net Income Over Shareholders' Equity
Work out a company's return on equity — the headline profitability metric for shareholders, and the figure Warren Buffett famously watches more closely than earnings growth alone.
Adjust the inputs and select Calculate for a full breakdown.
Compare Common Scenarios
How the numbers shift across typical situations for this calculator:
| Scenario | Return on equity | Non-return share |
|---|---|---|
| $50k income · $500k equity | 10.00% | 90.00% |
| $2M income · $10M equity | 20.00% | 80.00% |
| $200k income · $800k equity | 25.00% | 75.00% |
| $80k income · $1M equity | 8.00% | 92.00% |
How This Calculator Works
Enter net income (profit after all expenses, interest, and tax) and average shareholders' equity over the same period. The calculator divides one by the other and multiplies by 100 to give ROE, with the non-return share shown alongside.
The Formula
Part as a Percentage of a Whole
Part is the portion, Whole is the total it belongs to
Worked Example
A company earning $50,000 of net income on $500,000 of average shareholders' equity posts a 10% ROE — shareholders are earning a 10% return on the book value of what they own. S&P 500 ROE has historically averaged 12% to 16%; top-quartile businesses sustainably clear 20%.
Key Insight
ROE rewards both efficient operations and aggressive leverage — a company can post a high ROE either by generating great profit on its capital or by carrying a lot of debt. DuPont analysis breaks ROE into three drivers: profit margin, asset turnover, and equity multiplier (leverage). High ROE from operations is durable; high ROE from leverage is fragile.
DuPont decomposition — where ROE actually comes from
ROE = Net Margin × Asset Turnover × Equity Multiplier. Net Margin (net income / revenue) measures profitability. Asset Turnover (revenue / total assets) measures asset efficiency. Equity Multiplier (total assets / equity) measures financial leverage. A company can achieve 20% ROE through any combination of these three — but the implication varies.
Three companies all delivering 20% ROE: (1) Tech company — 25% margin × 1.5 turnover × 1.0 multiplier (no debt) = 20% ROE driven by margin. (2) Retailer — 5% margin × 2.0 turnover × 2.0 multiplier (modest debt) = 20% ROE driven by efficiency + leverage. (3) Bank — 30% margin × 0.08 turnover × 8.0 multiplier (very high leverage) = 20% ROE driven primarily by leverage. The 20% ROE looks identical; the underlying risks are very different.
For investor analysis, decompose every ROE into its DuPont components before drawing conclusions. High ROE driven by margin × efficiency (low leverage) is sustainable and high-quality — characteristic of Buffett's preferred businesses. High ROE driven primarily by leverage is fragile and reverses sharply in downturns — characteristic of banks before 2008 and many real estate investment trusts.
Sustainable ROE — the constraint of competitive equilibrium
ROE far above the cost of equity (typically 8-10% for stable U.S. businesses) tends to be eroded by competition. Microsoft's 35-45% ROE attracts capable competitors who try to replicate the business model; over decades, this typically forces ROE down toward the cost-of-equity (the 'efficient market' for capital).
Sustained high ROE requires durable competitive moats. Network effects (Apple ecosystem, Google search), brand value (Coca-Cola, Hermès), regulatory advantages (utilities, healthcare-network providers), high switching costs (enterprise software with deep integrations), proprietary technology (semiconductor equipment, certain biotech), or scale economics (Walmart, Amazon, Facebook).
Companies that sustain 25%+ ROE over 20+ years are rare — typically have multiple compounding moats. Coca-Cola, Procter & Gamble, Microsoft, Apple, Google, Visa, MasterCard, Moody's, S&P, AutoZone all have multi-decade histories of high sustainable ROE. These are the 'compounders' of value investing — businesses that can deploy capital at attractive returns sustainably.
Sustainable ROE by U.S. sector (Damodaran 2024)
Reference long-run sustainable ROE by sector. Persistent ROE substantially above sector median indicates competitive moat.
| Sector | Median ROE | Top quartile ROE | Notes |
|---|---|---|---|
| Software (Internet) | ~22% | ~40% | High-margin; capital-light |
| Tobacco | ~45% | ~80% | Brand-driven; capital-light |
| Pharma (Branded) | ~22% | ~35% | Patent-protected |
| Consumer Staples | ~18% | ~30% | Brand premium |
| S&P 500 (overall) | ~16% | ~25% | |
| Banks (Money Center) | ~10% | ~14% | Leverage-driven |
| Banks (Regional) | ~10% | ~14% | |
| Insurance (Life) | ~8% | ~12% | |
| Healthcare Services | ~14% | ~22% | |
| Industrials (Heavy) | ~13% | ~22% | |
| Utilities | ~10% | ~13% | Regulated returns |
| Auto Manufacturing | ~10% | ~16% | Cyclical |
| Trucking | ~12% | ~20% |
Long-run cost of equity for U.S. companies typically 8-10%. ROE meaningfully above cost of equity represents economic value creation; ROE below cost of equity represents value destruction even if the company is 'profitable' on GAAP basis. The capital allocation question is whether the business should reinvest, return capital via dividends/buybacks, or both.
Frequently Asked Questions
How is return on equity calculated?
Divide net income by shareholders' equity and multiply by 100. $50,000 of net income on $500,000 of equity is a 10% ROE.
What is a good ROE?
S&P 500 averages 12% to 16%; quality businesses sustainably clear 20%; weak companies often run single digits or negative. Compare against industry peers and against the company's history.
Why is ROE preferred over net income?
Net income alone hides scale — a $50M profit looks impressive until you learn the company has $500M of equity earning only 10%. ROE puts profit in context against the capital used to generate it.
What is DuPont analysis?
A breakdown of ROE into three drivers: profit margin (net income/revenue), asset turnover (revenue/assets), and equity multiplier (assets/equity, i.e. leverage). It exposes whether ROE comes from operations or from debt.
Can high ROE be a warning sign?
Yes — when driven by aggressive leverage rather than operations. A 25% ROE from a 5x equity multiplier is a 5% return on assets levered up; the underlying business may be only average. Always check the leverage source.
When is this calculator unreliable?
When comparing across companies with very different capital structures (high leverage inflates ROE — use DuPont decomposition to separate margin, efficiency, and leverage contributions). Also unreliable when book equity is distorted by goodwill or one-time impairments (use return on tangible equity instead), or for cyclical companies in unusual years (use 5-year average for cyclical sectors).
References & Authoritative Sources
- U.S. Securities and Exchange Commission (SEC) — Beginners' Guide to Financial Statements · consulted June 1, 2026 · Federal investor education on financial metrics
- CFA Institute — Equity Asset Valuation — Standard Reference on ROE Analysis · consulted June 1, 2026 · Industry standard methodology for ROE analysis and DuPont decomposition
- Damodaran Online (NYU Stern) — Industry ROE by Sector · consulted June 1, 2026 · Authoritative academic source for sector ROE benchmarks
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Methodology & Review
Return on Equity (ROE) equals net income / shareholders' equity × 100. The calculator returns ROE as a percentage. ROE measures how effectively a company generates profit from shareholder capital — the most-cited profitability metric in fundamental analysis. U.S. averages: S&P 500 ~15-18% (recent years above long-run); banks 10-13%; insurance 8-12%; consumer staples 25-40%; tech 25-50%+. DuPont decomposition: ROE = Net Margin × Asset Turnover × Equity Multiplier — separating ROE into profitability, efficiency, and leverage components. RELIABILITY: Reliable for direct ROE calculation. Less reliable when comparing across companies with very different capital structures (a heavily-leveraged company can show high ROE through equity-multiplier leverage rather than operational excellence — DuPont decomposition separates the sources), when book value is distorted by goodwill or impairments, or for cyclical companies in extreme years (use 5-year average for normalization).
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