Return on Equity (ROE) Calculator

Return on equity, or ROE, measures net income relative to the accounting capital attributable to shareholders. The basic formula divides net income by shareholders' equity and multiplies by 100. If a company earns $5 million on $25 million of equity, ROE is 20 percent. In simple terms, the company reported twenty dollars of profit for each one hundred dollars of book equity during that period. ROE is widely used by owners and analysts because it connects profitability with the capital shareholders have invested and retained in the business. However, a high figure can arise from strong operations, heavy borrowing, unusually low equity, share repurchases, or one-time gains. It should not be interpreted as a complete measure of quality. Negative equity can make the ratio economically confusing, so the ROE calculator requires a positive denominator. The optional inputs provide parts of a DuPont analysis. Net profit margin equals net income divided by revenue. Asset turnover equals revenue divided by total assets. The equity multiplier equals total assets divided by equity. Multiplying those three factors gives ROE when the statement figures are defined consistently. This decomposition helps distinguish a high return created by healthy margins or efficient asset use from one amplified mainly by leverage. Debt to equity, shown here as total liabilities divided by equity, gives another direct view of balance-sheet leverage. For better period alignment, analysts often use average shareholders' equity and average assets from beginning and ending balance sheets because income and revenue accumulate over time. Acquisitions, stock issuance, repurchases, large dividends, write-downs, and accumulated losses can change equity sharply. Banks, insurers, manufacturers, retailers, and software companies also operate with different normal leverage and margins, making cross-industry rankings unreliable. Compare ROE with the company's prior years, direct competitors, return on assets, cash flow, debt service, and cost of equity. A rising ratio alongside weak cash generation or rapidly increasing debt deserves investigation. A temporarily lower ratio may be reasonable if newly raised capital is being invested for future growth. The calculator uses reported accounting values and does not normalize unusual items, comprehensive income, preferred equity, or minority interests. It provides a transparent ratio and supporting diagnostics, not a forecast, valuation, or recommendation. Always document the exact equity and income definitions used so repeated calculations remain comparable.