How to use the ROE and ROA calculator
ROE & ROA gives both returns from three figures, in millions of dollars:
- Choose how to enter the balance sheet. Start-and-end figures are averaged, which is the standard method. Use one figure each if you already have averages.
- Net income for the year, from the income statement. Use the amount attributable to common shareholders.
- Shareholders’ equity at the start and end of the year, from the balance sheet. Leave out minority (non-controlling) interests.
- Total assets at the start and end of the year.
DuPont analysis explains where the ROE comes from. Enter revenue, net income, average total assets and average equity for the 3-step version. Add pre-tax income (EBT) and operating income (EBIT) to split the profit margin further into the 5-step version.
The formulas
ROA = Net income ÷ Average total assets
Equity multiplier = Average total assets ÷ Average equityAverage = (start of year + end of year) ÷ 2. ROE = ROA × equity multiplier.
The DuPont identity splits ROE into three ratios that multiply back to it:
5-step: ROE = (NI ÷ EBT) × (EBT ÷ EBIT) × (EBIT ÷ Revenue) × (Revenue ÷ Assets) × (Assets ÷ Equity)NI ÷ EBT is the tax burden (share of pre-tax profit kept after tax), EBT ÷ EBIT the interest burden (share of operating profit left after interest), EBIT ÷ revenue the operating margin, revenue ÷ assets the asset turnover and assets ÷ equity the equity multiplier.
A worked example
Company A earned $1,200M. Its equity was $7,600M at the start of the year and $8,400M at the end, an average of $8.00B. Total assets averaged $20.00B.
ROE is 15.0% and ROA is 6.0%. The equity multiplier of 2.50× links the two: each dollar of equity supports 2.50 dollars of assets.
The DuPont tab, with revenue of $10,000M, shows how the 15.0% is built: a 12.0% net margin, asset turnover of 0.50× and the 2.50× multiplier. The 5-step version adds that taxes leave 75% of pre-tax profit and interest leaves 89% of operating profit, on an EBIT margin of 18.0%.
How leverage inflates ROE
Hold profit and assets fixed and change only how the assets are funded. Every dollar of debt that replaces a dollar of equity shrinks the denominator of ROE, while ROA stays where it was:
| Funding of the same $20B of assets | Equity multiplier | ROE | ROA |
|---|---|---|---|
| Mostly equity ($16B) | 1.25× | 7.5% | 6.0% |
| The example ($8B) | 2.50× | 15.0% | 6.0% |
| Mostly debt ($4B) | 5.00× | 30.0% | 6.0% |
The business is identical in all three rows, yet ROE ranges from 7.5% to 30.0%. In practice extra debt also adds interest cost, so profit falls a little, but as long as the assets earn more than the after-tax cost of the debt, ROE still rises. The catch is that leverage works both ways: a drop in profit hits a thinly capitalized company’s ROE just as hard, and debt has to be repaid in bad years too. That is why ROE should always be read next to ROA and a leverage measure such as debt to equity.
Buybacks and negative equity
Share buybacks reduce equity. When they are funded with borrowed money, assets stay roughly the same while equity falls and interest costs rise. Suppose Company A borrows $2B at 5% to buy back shares. After tax at 21%, interest cuts net income to $1,121M, and equity falls to $6B. ROE rises to 18.7% even though ROA falls to 5.6%: shareholders own a more leveraged version of a slightly less profitable company.
Carried far enough, buybacks and dividends can push equity below zero. Some well-known, profitable US companies report negative shareholders’ equity for this reason. ROE then becomes meaningless, because dividing a profit by a negative number gives a negative result, and dividing by a tiny positive one gives an absurdly high one. For these companies, ROA and return on invested capital, which counts debt as part of the capital base, are more useful.
Reading the DuPont breakdown
Two companies with the same ROE can be very different businesses. A discount retailer typically earns a thin margin on high asset turnover; a software company earns a wide margin on fewer assets; a bank earns little on its assets and relies on a high equity multiplier. The breakdown tells you which lever drives the return, and so which risk to watch: margin pressure, slowing turnover or rising leverage.
Compare the components over several years. An ROE that holds steady while the equity multiplier climbs and the margin shrinks is weaker than it looks.
What this calculator does not include
The ratios use accounting figures, which depend on accounting choices. Write-downs, share buybacks and acquisitions change equity and assets without changing the underlying business, and intangible assets built in-house are mostly missing from the balance sheet, which inflates returns for asset-light companies. One-off gains or losses distort net income; use an adjusted figure if a single item dominates the year. The calculator also takes the average of only two balance sheet dates, so large changes in the middle of the year are not captured exactly.