Return on Equity (ROE) Calculator
Measure company profitability relative to shareholder equity
Company Financials
ROE Interpretation
- ROE >= 20%: Excellent
- ROE 15-20%: Good
- ROE 10-15%: Average
- ROE < 10%: Below Average
About This Calculator
Calculate Return on Equity (ROE) to measure company profitability relative to shareholder equity. Compare against industry benchmarks (10-20% typical), analyze trends, and use DuPont decomposition for deeper insights.
Frequently Asked Questions
What is Return on Equity (ROE) and how is it calculated?
ROE measures how effectively a company generates profit from shareholder equity. Formula: ROE = Net Income / Shareholder Equity × 100%. Example: A company earning $500,000 net income with $2,500,000 in equity has ROE = 20%, meaning every dollar of equity generates $0.20 in profit. Use average equity [(beginning + ending) / 2] for accuracy when equity changes during the year. ROE above 15% is generally considered strong. Warren Buffett famously seeks companies with consistent ROE above 20%. ROE can be inflated by high debt (low equity base), so always examine alongside debt-to-equity ratio.
What is a good ROE by industry?
ROE benchmarks vary significantly across sectors (2025 data). Technology: 20-35% (Apple 160%, Microsoft 38%, typical tech 25%). Financial services: 10-18% (JPMorgan 15%, regional banks 10-12%). Healthcare: 15-25% (pharma 20-30%, hospitals 8-12%). Consumer staples: 15-25% (Procter & Gamble 30%, Coca-Cola 40%). Industrials: 12-20% (3M 25%, Caterpillar 18%). Utilities: 8-12% (regulated returns limit upside). Real estate (REITs): 5-12% (capital-intensive, high depreciation reduces net income). Retail: 15-30% (Costco 27%, Walmart 20%). An ROE significantly above industry average may indicate competitive advantage or excessive leverage — investigate which.
Why can a high ROE be misleading?
Three scenarios where high ROE misleads investors: (1) Excessive leverage — A company with $10M assets, $9M debt, and $1M equity earning $200K has 20% ROE but is extremely risky. DuPont analysis reveals the equity multiplier (assets/equity = 10x) is driving returns, not operations. (2) Negative equity — Companies with accumulated losses or massive buybacks can have negative equity, making ROE meaningless or artificially inflated. McDonald's had negative equity from 2016-2023 due to buybacks. (3) One-time gains — Asset sales, tax benefits, or legal settlements boost net income temporarily. Always examine 3-5 year ROE trends, not single-year snapshots. Compare ROE against Return on Assets (ROA = Net Income / Total Assets) — a wide gap between ROE and ROA signals heavy leverage.
How do share buybacks affect ROE?
Share buybacks reduce shareholder equity (the denominator), mechanically increasing ROE even without earnings growth. Example: Company with $1M net income and $5M equity = 20% ROE. After $2M buyback: same $1M income / $3M equity = 33% ROE — a 65% improvement with zero operational change. This is why companies like Apple (ROE 160%+) show extraordinarily high ROE — decades of buybacks have reduced equity far below asset levels. To see through buyback effects: (1) Track Return on Invested Capital (ROIC) instead, which includes both debt and equity. (2) Examine absolute earnings growth alongside ROE. (3) Calculate ROE on a pre-buyback equity basis. Buyback-driven ROE improvement is not inherently bad but does not indicate improving business performance.
How is ROE different from ROA and ROIC?
Three profitability metrics measuring different things. ROE (Return on Equity) = Net Income / Equity. Measures returns to shareholders after debt costs. Affected by leverage. ROA (Return on Assets) = Net Income / Total Assets. Measures how efficiently all assets generate profit regardless of funding source. Typically 5-15% for healthy companies. ROIC (Return on Invested Capital) = NOPAT / (Debt + Equity - Cash). The most comprehensive measure — shows returns on all capital deployed in the business, neutral to capital structure. ROIC above weighted average cost of capital (WACC) indicates value creation. Example: Company with 25% ROE, 8% ROA, 12% ROIC, 9% WACC. The ROIC > WACC (12% > 9%) confirms genuine value creation, while the wide ROE-ROA gap (25% vs 8%) reveals significant leverage amplification.