Return on Equity (ROE) Calculator
Return on Equity measures how efficiently a company turns shareholders' own money into profit. This calculator computes ROE directly, breaks it apart into its three DuPont drivers (margin, turnover, and leverage), projects the fastest growth rate a company can sustain purely from retained earnings, and checks whether that ROE is actually good enough to clear what shareholders require — each with its own visual and a plain-English explanation of what the number actually tells you.
Background
ROE = Net Income ÷ Shareholders' Equity. It answers one question: for every \$1 shareholders have invested, how much profit did the company generate this period? A high ROE sounds good, but the same ROE can come from very different places — a fat profit margin, a fast-turning asset base, or simply a lot of borrowed money doing the work. And even a "good-looking" ROE isn't necessarily good news once you compare it to what shareholders could earn elsewhere for the same risk. Telling all of this apart is most of what makes ROE analysis interesting.
How to use this calculator
- Choose Calculate ROE for the plain ratio, plus a gauge showing whether it's weak, average, or strong, an optional industry benchmark comparison, and a "Rule of 72" doubling-time estimate.
- Choose DuPont Breakdown to see exactly what's driving the ROE — profit margin, asset turnover, or financial leverage — using a flow diagram of the three factors multiplying into the result.
- Choose Sustainable Growth to see how fast a company's equity can compound using only retained earnings, with a 5-year growth projection.
- Choose Value Creation Check to see whether that ROE is actually good enough — by comparing it to the minimum return shareholders require (the cost of equity) and calculating the resulting economic profit or loss.
- Click Calculate to see the visual plus a full step-by-step explanation and a callout on what the result actually means.
How ROE analysis works
ROE is a single ratio, Net Income ÷ Shareholders' Equity — it tells you the return generated on the money shareholders actually have at stake, not on total assets or sales.
The DuPont identity splits that ratio into three levers: Net Profit Margin (profitability per dollar of sales), Asset Turnover (sales per dollar of assets), and the Equity Multiplier (assets per dollar of equity, i.e. leverage). Multiplying all three always reproduces the exact same ROE.
Leverage is the tricky lever — it amplifies ROE without any change in operating performance. A company can post an impressive ROE purely by financing itself with debt, which also amplifies losses if things go wrong.
If shareholders' equity is negative (common after aggressive buybacks or sustained losses), ROE becomes a division by a negative number — mathematically valid, but no longer a meaningful measure of profitability.
The Sustainable Growth Rate (ROE × retention ratio) estimates the fastest rate a company can grow equity using only the profit it keeps — without borrowing more or selling new shares.
A positive ROE doesn't automatically mean shareholders are being adequately rewarded. Comparing ROE to the cost of equity — the minimum return investors require for the risk — reveals whether the company is creating or destroying real economic value, something the raw ratio alone can't show.
Formula & Equations Used
Return on Equity: ROE = Net Income ÷ Shareholders' Equity
DuPont decomposition: ROE = (Net Income ÷ Revenue) × (Revenue ÷ Total Assets) × (Total Assets ÷ Equity)
Sustainable Growth Rate: g = ROE × (1 − Payout Ratio)
Equity projection under sustainable growth: Equity_t = Equity_0 × (1 + g)^t
Rule of 72 (doubling time): Years to double ≈ 72 ÷ ROE%
Equity charge: Equity Charge = Cost of Equity × Shareholders' Equity
Residual income (economic profit): Residual Income = Net Income − Equity Charge
Example Problems & Step-by-Step Solutions
Example 1 — Basic ROE
Net income \$500,000; shareholders' equity \$2,500,000.
Step: ROE = 500,000 ÷ 2,500,000 = 0.20.
Result: 20% ROE — comfortably in the "strong" range, above a typical retail benchmark of ~15%, and — per the Rule of 72 — equity reinvested at this rate would roughly double every 3.6 years.
Example 2 — Negative equity trap
Net income \$800,000 (profitable); equity −\$1,200,000 (from heavy buybacks).
Step: ROE = 800,000 ÷ (−1,200,000) = −0.667.
Result: −66.7% ROE — despite the company earning a profit. The negative denominator flips the sign; this number is not a performance signal here.
Example 3 — DuPont decomposition
Net income \$2,000,000; revenue \$100,000,000; assets \$50,000,000; equity \$10,000,000.
Step: margin = 2%, turnover = 2.0×, multiplier = 5.0×. ROE = 0.02 × 2.0 × 5.0 = 0.20.
Result: 20% ROE — the same figure as a high-margin luxury brand, but built entirely from thin margins plus turnover and leverage instead.
Example 4 — Sustainable growth rate
Net income \$400,000; equity \$2,000,000; 0% dividend payout.
Step: ROE = 20%. Retention = 100%. g = 0.20 × 1.00 = 0.20.
Result: 20% sustainable growth — \$2,000,000 in equity compounds to roughly \$4,976,640 after 5 years with zero external financing.
Example 5 — A decent ROE that still destroys value
Net income \$160,000; equity \$2,000,000; cost of equity 12%.
Step: ROE = 160,000 ÷ 2,000,000 = 8%. Equity charge = 12% × 2,000,000 = \(240,000. Residual income = 160,000 − 240,000 = −\)80,000.
Result: an 8% ROE sounds respectable, but it destroys \$80,000 of economic value because shareholders required 12% for the risk. ROE alone hid this.
Frequently Asked Questions
What counts as a "good" ROE?
There's no universal number, but many investors treat roughly 15–20% as strong, 5–15% as average, and below 5% (or negative) as weak — always in the context of the specific industry's typical range, and ideally checked against the company's cost of equity too.
Why can ROE be negative or absurdly high?
ROE divides by shareholders' equity, which can shrink toward zero or go negative from losses or large buybacks. A tiny or negative denominator can send ROE to extreme or nonsensical values even when operating performance hasn't changed much — this calculator flags equity figures that are zero or too close to zero to produce a meaningful ratio.
Does a higher ROE always mean a better investment?
Not necessarily. The DuPont breakdown exists precisely because ROE alone doesn't say whether the return comes from genuine operating efficiency or simply from taking on more debt. And the Value Creation Check goes further: even a solid-looking ROE can destroy value if it doesn't clear the cost of equity.
What's the difference between ROE and ROA?
Return on Assets (Net Income ÷ Total Assets) measures profitability against everything the company owns; ROE measures it only against the shareholders' slice. The gap between the two is explained by the equity multiplier — how much debt is amplifying returns.
What does the sustainable growth rate assume?
It assumes the company keeps its current margins, asset efficiency, and leverage constant, and grows only using retained profits — no new debt or equity issuance. Real growth often exceeds or falls short of this if any of those assumptions change.
What is "cost of equity" and where does that number come from?
It's the minimum return shareholders require to compensate them for the risk of holding the stock instead of a safer alternative. In practice it's often estimated with models like CAPM; this calculator lets you enter your own estimate directly so you can see how the value-creation verdict changes with it.
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