What is ROE?
ROE = net income ÷ shareholders' equity. A company with $10 billion in equity and $1.5 billion in net income has an ROE of 15%. It tells shareholders how efficiently management turns their capital into profit.
How does DuPont analysis break down ROE?
| Component | Formula | What it shows |
|---|---|---|
| Net profit margin | Net income ÷ revenue | How much profit per sale |
| Asset turnover | Revenue ÷ total assets | How hard assets are working |
| Equity multiplier | Total assets ÷ equity | How much leverage is used |
Two companies with a 15% ROE can be very different—a luxury brand with fat margins, a retailer with high turnover, or a bank using lots of leverage. Analysts and investors do use this breakdown when pricing stocks (Soliman, 2008).
What's a good ROE, and what are the pitfalls?
A business that earns an ROE consistently above its cost of equity (often 8–10%) is creating value. But heavy borrowing or big buybacks shrink equity and inflate ROE, so check leverage, ROA and ROIC too. Remember the identity P/B = P/E × ROE.
FAQ
- Is a very high ROE always good?
- No. It may come from one-off gains or high debt—look at multi-year trends and the balance sheet.
- What does negative ROE mean?
- The company lost money, or in some cases has negative equity, which makes the ratio hard to interpret.
Sources reviewed: 2026-10-25
References
- Penman, S. H. (2013). Financial statement analysis and security valuation (5th ed.). McGraw-Hill.
- Soliman, M. T. (2008). The use of DuPont analysis by market participants. The Accounting Review, 83(3), 823–853.