What is Return on Equity (ROE)?
How much profit the business generates on each dollar of owner capital.
Return on Equity (ROE): definition
ROE answers a fundamental question for owners: what return am I earning on the capital in this business? A higher ROE means more profit per dollar of equity. Because ROE can be lifted by taking on debt (which shrinks equity relative to assets), it is best read alongside leverage - a high ROE built on heavy debt carries more risk than one built on strong margins.
Return on equity
ROE = Net Income ÷ Average Shareholders Equity × 100
The DuPont breakdown splits ROE into net margin × asset turnover × financial leverage, showing whether returns come from profitability, efficiency, or debt.
How Fintra handles it
Fintra computes ROE and related returns (on assets and invested capital) from the live ledger, and can present the DuPont decomposition so you can see whether a change in ROE came from margin, asset efficiency, or leverage. That distinction matters for judging quality of returns, not just their level.
- ROE, ROA, and ROIC computed from the same live financials
- DuPont decomposition separates margin, efficiency, and leverage
- Trends tracked so return quality is visible over time
Worked example
Frequently asked questions
What is a good return on equity?
An ROE in the mid-teens or higher is often viewed as strong, but it varies by industry and capital structure. More important than the level is whether the return is driven by genuine profitability and efficiency rather than excessive leverage, which the DuPont breakdown reveals.
What is the difference between ROE and ROA?
ROE measures profit against shareholders equity; ROA measures profit against total assets. ROA ignores how assets are financed, while ROE reflects the effect of leverage. Comparing the two shows how much of ROE comes from debt.
How can debt inflate ROE?
Borrowing lets a business hold fewer equity dollars for the same assets, so the same profit divided by smaller equity yields a higher ROE. This boosts returns but adds financial risk, so a high ROE should always be read alongside the debt level.
What is the DuPont analysis of ROE?
It decomposes ROE into three drivers: net profit margin, asset turnover, and financial leverage. This shows whether returns come from profitability, efficient use of assets, or borrowing - a more insightful view than the single ROE figure.
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