ROE (Return on Equity)
Net income as a percent of shareholders' equity
What is ROE (Return on Equity)?
Return on Equity (ROE) measures how efficiently a company generates profit from shareholders' equity. It is a key measure of profitability and management quality: Warren Buffett uses consistently high ROE (above 15%) as a primary screen for quality businesses. ROE can be decomposed via the DuPont framework into three drivers: profit margin × asset turnover × financial leverage. This decomposition reveals whether high ROE comes from genuine operational excellence or from excessive leverage. A company can have high ROE simply by taking on more debt, which increases risk. The most valuable ROE is high and driven by high margins and asset efficiency, not leverage.
Formula
ROE = Net Income / Shareholders' Equity × 100%
DuPont: ROE = Net Margin × Asset Turnover × Equity Multiplier
Shareholders' Equity = Total Assets − Total Liabilities
Use average equity: (Beginning + Ending) / 2 for more accuracy
Calculator
How to Use
- 1Find net income: From the income statement: the bottom line after all expenses and taxes.
- 2Find shareholders' equity: From the balance sheet. Use average equity (start + end of year) ÷ 2 for precision.
- 3Divide: Net Income ÷ Shareholders' Equity × 100 = ROE %.
- 4Interpret quality: Run the DuPont decomposition to understand the source of ROE. High margin-driven ROE is more durable than leverage-driven ROE.
Worked Example
Example: Consumer brand company
Net Income
$2.5B
Avg Equity
$12B
ROE = $2.5B / $12B = 20.8%. Above the 15% threshold Buffett uses as a quality screen. DuPont check: if this is driven by a 15% net margin and modest leverage rather than debt, it signals a genuinely high-quality business with durable competitive advantage.