About

Return on Equity (ROE) is the single most important metric for equity investors. It answers the fundamental question: 'For every dollar I invest, how much profit does the company generate?' A consistently high ROE is the hallmark of a company with a durable competitive advantage (a moat).

However, a high ROE can sometimes be misleading if driven solely by debt. This tool includes a DuPont Analysis module, which breaks down ROE into three drivers: Profit Margin (operational efficiency), Asset Turnover (asset use efficiency), and Financial Leverage. This helps analysts understand why the ROE is high or low.

Formulas

The standard formula is Net Income divided by Shareholder Equity. The DuPont expansion shows the multiplication:

ROE = Net IncomeRevenue × RevenueAssets × AssetsEquity

Reference Data

Component	DuPont Formula Part	Interpretation	Example (Retail)
Net Profit Margin	Net Income / Revenue	Pricing power & cost control	3.5%
Asset Turnover	Revenue / Assets	Sales generation efficiency	2.5x
Financial Leverage	Assets / Equity	Use of debt to boost returns	1.8x
ROE	Product of Above	Total Efficiency	15.75%

Frequently Asked Questions

DuPont Analysis is a framework that decomposes ROE into three parts: Net Profit Margin, Asset Turnover, and Financial Leverage. It reveals whether a company's ROE is driven by high margins, efficient asset use, or simply by taking on dangerous amounts of debt.

While leverage acts as a multiplier for ROE during good times, it amplifies losses during downturns. A high ROE driven entirely by a Leverage Multiplier of 5x or 6x is often a sign of a fragile balance sheet rather than operational excellence.

Companies with a sustainable competitive advantage ('Moat') often maintain an ROE above 15-20% for decades without excessive leverage. This indicates they have pricing power (high margins) or superior efficiency that competitors cannot replicate.

Yes. Just like ROA, it is more accurate to use the average of the beginning and ending shareholder equity for the period to account for share buybacks or issuances during the year.