Definition
ROE shows the return generated on every dollar of shareholders' equity. High ROE indicates efficient use of equity capital. The DuPont decomposition breaks ROE into three components: profit margin, asset turnover, and financial leverage, revealing the sources of profitability.
Consistently high ROE (15%+) combined with moderate leverage typically signals a high-quality business with a competitive moat.
functions Formula
ROE = Net Income / Shareholders' Equity
lightbulb Example
A company with $5M net income and $25M shareholders' equity has ROE of 20%. DuPont analysis reveals: 10% net margin × 1.5 asset turnover × 1.33 leverage = 20%.
Pro Tip
Check if high ROE comes from genuine profitability or excessive debt leverage using DuPont decomposition.
verified_user Key Points
- ROE above 15% generally considered strong
- DuPont analysis reveals profit, efficiency, and leverage drivers
- High leverage artificially inflates ROE
- Compare ROE within same industry