1. What is Return on Equity (ROE)?

Return on Equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. It shows how effectively management is using a company's assets to create profits.

2. How Does the Calculator Work?

The calculator uses the DuPont formula for ROE:

Where:

• Profit Margin — Net income divided by revenue (decimal)
• Asset Turnover — Revenue divided by average total assets (unitless)
• Leverage — Average total assets divided by average shareholders' equity (unitless)

Explanation: This breakdown shows how profit margin, asset use efficiency, and financial leverage contribute to overall return on equity.

3. Importance of ROE Calculation

Details: ROE is a key metric for investors to assess a company's profitability and efficiency in generating returns on shareholders' investments.

4. Using the Calculator

Tips: Enter profit margin as a decimal (e.g., 0.15 for 15%), asset turnover and leverage as unitless ratios. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good ROE?
A: Generally, ROE above 15% is considered good, but this varies by industry. Compare to competitors for context.

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

Q3: What's the difference between ROE and ROA?
A: Return on Assets (ROA) doesn't consider leverage, while ROE shows return to shareholders after leverage.

Q4: How often should ROE be calculated?
A: Typically calculated quarterly with financial statements, but can be calculated whenever financial data is available.

Q5: What are limitations of ROE?
A: ROE can be manipulated through accounting methods and doesn't account for risk. Should be used with other metrics.