1. What is Return on Equity (ROE)?

Return on Equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It's expressed as a percentage and calculated as net income divided by shareholder equity.

2. Understanding the DuPont Formula

The DuPont analysis breaks down ROE into three components:

Where:

• Net Income/Sales — Profit Margin
• Sales/Assets — Asset Turnover
• Assets/Equity — Financial Leverage

Explanation: This breakdown helps analysts understand what's driving a company's ROE - whether it's from profit margins, efficient use of assets, or financial leverage.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors as it shows how effectively management is using shareholders' capital to generate profits. Higher ROE generally indicates more efficient management.

4. Using the Calculator

Tips: Enter all values in USD. Net Income, Sales, Assets, and Equity must be positive numbers. The calculator will compute ROE as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE value?
A: While it varies by industry, generally an ROE of 15-20% is considered good. Compare to industry averages for better context.

Q2: Can ROE be too high?
A: Extremely high ROE may indicate excessive debt (high financial leverage) rather than true operational efficiency.

Q3: How does ROE differ from ROI?
A: ROI measures return on total investment, while ROE specifically measures return on shareholders' equity.

Q4: Why use DuPont analysis?
A: It helps identify whether ROE is driven by profit margins, asset efficiency, or financial leverage.

Q5: How often should ROE be calculated?
A: Typically calculated quarterly with financial statements, but can be done whenever financial data is updated.