Return on Equity (ROE) Calculator
Return on Equity (ROE) measures the rate of net return generated on the book value of shareholders’ equity. It is one of the most closely tracked metrics by equity investors to evaluate how effectively management reinvests shareholder capital.
Sensitivity Analysis
Evaluate how variations in key operational drivers impact Return on Equity (ROE).
| Sensitivity Case | Assumption Shift | Driver Value | Return on Equity (ROE) | Impact vs Base |
|---|
Formula & Methodology
ROE (%) = (Net Income / Shareholders Equity) * 100Net IncomeNet profit after taxes and interest expenses.
Shareholders EquityTotal Assets minus Total Liabilities (Book Value of Equity).
Practical Worked Example
Summit Tech generated $3,000,000 in net income on a total shareholder equity base of $15,000,000.
Interpretation & Industry Benchmarks
ROE compares profitability to the capital provided by shareholders. A consistently high ROE (15%+) is a hallmark of high-quality compounders with durable competitive advantages.
Net losses eroding equity base.
Returns fail to comfortably exceed typical equity cost of capital.
Standard benchmark for profitable, well-managed corporations.
Superior compounding power (verify leverage level).
Industry Nuance: High debt can artificially inflate ROE. Use the 3-step DuPont formula to confirm if high ROE stems from high margins, fast asset turnover, or high debt.
Analytical Limitations
- Can be artificially inflated by excessive debt (low equity denominator).
- Share buybacks can reduce equity to near-zero or negative, making ROE mathematically distorted or uninterpretable.
Frequently Asked Questions
What is a good ROE?
An ROE of 15% to 20% is broadly considered the gold standard across most industries. Companies exceeding 20% over 5+ years without excessive leverage are elite compounders.