Return on equity

Return on equity is net income divided by average shareholders' equity, measuring the profit earned per euro of owners' funds invested; it is the headline profitability ratio from the shareholders' perspective.

ByHoang TruongUpdated July 2, 2026

FrameworkRatio analysis

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A tree shows return on equity, fifteen percent, produced when net income of three million euros is divided by average equity of twenty million. The DuPont decomposition splits that fifteen percent into three multiplied drivers: net profit margin, asset turnover, and the equity multiplier, so two firms with the same ROE can differ sharply in profitability, efficiency, and leverage.

Where it fits

SubjectFinancial AccountingCoreTopicFinancial Statement Analysis & RatiosCore

The formula

LaTeX

\text{ROE} = \dfrac{\text{Net income}}{\text{Average shareholders' equity}} \times 100

Variables

$N I$: Net income for the period (€)
$E$: Average shareholders' equity (mean of opening and closing equity balances) (€)

The headline profitability ratio from the shareholders' perspective; the benchmark return against which the cost of equity is compared.

LaTeX

\text{ROE} = \underbrace{\dfrac{\text{NI}}{\text{Rev}}}_{\text{Profit margin}} \times \underbrace{\dfrac{\text{Rev}}{\text{Assets}}}_{\text{Asset turnover}} \times \underbrace{\dfrac{\text{Assets}}{\text{Equity}}}_{\text{Equity multiplier}}

Variables

$N I / R e v$: Net profit margin (ratio)
$R e v / A sse t s$: Asset turnover (ratio)
$A sse t s / E q u i t y$: Equity multiplier (measure of financial leverage) (ratio)

DuPont decomposition; reveals whether ROE is driven by profit margins, asset efficiency or financial leverage.