There is no universal "good" ROE, because it depends heavily on the industry and the company’s risk profile. As a rough rule of thumb, many analysts like to see a sustainable ROE above the company’s cost of equity and above its main competitors. Capital‑intensive or regulated industries often have lower typical ROE than asset‑light software or services businesses.

Should I use beginning, ending, or average equity for ROE?

Best practice is to use average shareholders’ equity: (Beginning equity + Ending equity) / 2. Equity is a stock variable that can change during the year, so averaging smooths out large changes from share issues, buybacks, or big losses. Using only ending equity can distort ROE if there were major capital changes during the period.

How is ROE different from ROA and ROI?

ROE measures profit relative to shareholders’ equity only, so it is sensitive to leverage. ROA (Return on Assets) measures profit relative to total assets and ignores how those assets are financed. ROI is a more generic term that can refer to many different return measures. A company can have a high ROE and modest ROA if it uses a lot of debt financing.

Yes. Extremely high ROE can be a red flag. It may be driven by very low equity (for example, after large share buybacks or accumulated losses) or by excessive leverage, which increases financial risk. Always look at ROE together with the balance sheet, debt ratios, and the DuPont breakdown to understand what is driving it.

What is DuPont ROE analysis?

DuPont analysis decomposes ROE into three drivers: Profit margin (Net income / Revenue), Asset turnover (Revenue / Total assets), and Equity multiplier (Total assets / Equity). Multiplying these three ratios gives ROE. This helps you see whether ROE is driven by profitability, efficiency, or leverage.

Return on Equity (ROE) Calculator – Formula, Examples & Analysis

What is Return on Equity (ROE)?

Return on Equity (ROE) measures how efficiently a company turns shareholders’ equity into profit. It answers the question: “For every dollar of equity invested in this business, how much profit does it generate per year?”

Basic ROE formula

\[ \text{ROE} = \frac{\text{Net income}}{\text{Average shareholders' equity}} \times 100 \]

Net income comes from the income statement, while shareholders’ equity comes from the balance sheet. Using average equity (beginning + ending, divided by 2) is standard practice because equity can change during the year.

How to calculate ROE step by step

Get net income for the period (usually 12 months) from the income statement.
Get beginning and ending equity from the balance sheet for the same period.
Compute average equity: \[ \text{Average equity} = \frac{\text{Beginning equity} + \text{Ending equity}}{2} \]
Apply the ROE formula: \[ \text{ROE} = \frac{\text{Net income}}{\text{Average equity}} \times 100 \]
Interpret the result by comparing it to:
- the company’s own historical ROE,
- peers in the same industry, and
- the estimated cost of equity.

DuPont ROE: breaking ROE into drivers

The classic 3-step DuPont model decomposes ROE into three intuitive components:

DuPont ROE formula

\[ \text{ROE} = \underbrace{\frac{\text{Net income}}{\text{Revenue}}}_{\text{Profit margin}} \times \underbrace{\frac{\text{Revenue}}{\text{Total assets}}}_{\text{Asset turnover}} \times \underbrace{\frac{\text{Total assets}}{\text{Equity}}}_{\text{Equity multiplier}} \]

Profit margin shows how much profit is generated from each dollar of sales.
Asset turnover shows how efficiently assets are used to generate revenue.
Equity multiplier captures financial leverage (how much assets are funded by equity vs. debt).

Multiplying these three ratios gives the same ROE as the basic formula, but now you can see whether ROE is driven by profitability, efficiency, or leverage.

Worked example

Suppose a company reports the following for the year:

Net income: $250,000
Beginning equity: $1,400,000
Ending equity: $1,600,000

Average equity:

\[ \text{Average equity} = \frac{1{,}400{,}000 + 1{,}600{,}000}{2} = 1{,}500{,}000 \]

ROE:

\[ \text{ROE} = \frac{250{,}000}{1{,}500{,}000} \times 100 = 16.67\% \]

An ROE of about 16.7% means the company generated roughly 17 cents of profit for every dollar of equity invested during the year.

How to interpret ROE

Compare within the same industry. A 12% ROE may be excellent in utilities but weak in software.
Check stability over time. Consistently high and stable ROE is more attractive than a one‑off spike.
Look at leverage. Very high ROE with very high debt may be risky.
Compare to cost of equity. If ROE is below the cost of equity, the company is destroying shareholder value.

Limitations of ROE

Accounting choices (depreciation, provisions, write‑offs) can distort net income and equity.
Share buybacks reduce equity and can mechanically boost ROE without improving the business.
One‑time gains or losses can make ROE unusually high or low in a single year.
Negative equity makes ROE meaningless or misleading.

For a complete view, combine ROE with ROA, leverage ratios, cash‑flow metrics, and qualitative analysis of the business model.

Frequently asked questions

Is higher ROE always better?

Higher ROE is generally positive, but only if it is sustainable and not driven by excessive leverage or shrinking equity. Always check the DuPont breakdown and the balance sheet.

Can ROE be negative?

Yes. If net income is negative while equity is positive, ROE will be negative, indicating the company destroyed value for shareholders during the period.

Which ROE should I use for valuation?

For valuation models (like dividend discount or residual income), analysts usually use a normalized ROE based on several years of data, adjusted for one‑off items, and consistent with long‑term assumptions about profitability and leverage.

Return on Equity (ROE) Calculator

ROE Calculator

Result

DuPont breakdown