Return on Equity Quality Analyzer: Explain What Drives ROE
Compute return on equity (ROE) and then decompose it into profit margin, asset turnover, and leverage using DuPont analysis so you can see what is actually driving the number.
Return on equity
10.00%
Explain my ROE
DuPont: Net Margin x Asset Turnover x Equity Multiplier = ROE. The product reconciles to the reported ROE exactly when revenue and assets are supplied.
Worked examples: 25% x 0.8 x 1.0 = 20% (profitability-led); 5% x 2.0 x 2.0 = 20% (mixed); 25% x 0.10 x 8.0 = 20% (leverage-amplified). Same headline ROE, very different underlying risk.
Reliability checks
- Common equity changed by 25% or more within the period - the average is a rough proxy; interpret with care.
Compare periods
Turn on Compare with prior period above to see period-over-period ROE attribution.
Sector benchmark
Pick an industry above to compare your ROE against the Damodaran sector average.
This tool independently recomputes ROE, DuPont components, ROTE, and Shapley attribution from the figures entered. It provides a mathematical diagnostic, not investment, tax, or accounting advice.
Frequently Asked Questions
How is return on equity calculated?
ROE equals net income attributable to common shareholders divided by average common equity, times 100. Average equity is the beginning plus ending equity divided by two, because ROE mixes a flow (income) with a stock (equity).
What is DuPont decomposition?
A three-factor breakdown of ROE into Net Margin (common net income divided by revenue), Asset Turnover (revenue divided by average total assets), and Equity Multiplier (average total assets divided by average common equity). It exposes whether ROE comes from profitability, efficiency, or leverage.
When is ROE not meaningfully interpretable?
When average common equity is zero, negative, or crosses zero within the period; when common net income is negative; or when the balance-sheet mix is so unusual that the ratio's economic meaning breaks down. The diagnostic labels these cases so the number is not misread.
What is Return on Tangible Common Equity (ROTE)?
ROTE strips goodwill and other intangibles out of common equity before dividing net income by the average. It removes the distortion introduced by acquisitions accounted for at premium prices and is especially useful for banks and serial acquirers.
Why does a buyback sometimes lift ROE mechanically?
Because a repurchase reduces common equity even if net income is unchanged. The diagnostic flags a denominator-driven ROE increase when equity shrinks materially while income stays roughly stable across two periods.
How is the two-period ROE change attributed?
When comparison mode is on, the analyzer runs a three-factor Shapley decomposition of the change in DuPont ROE into margin, turnover, and leverage contributions. The three contributions sum exactly to the total change in DuPont ROE within a reconciliation tolerance.
Evidence, sources and editorial review
Return on Equity Quality Analyzer: Explain What Drives ROE groups its evidence and methodology review here so sources, assumptions and responsibility can be checked together.
References & Authoritative Sources
- U.S. Securities and Exchange Commission (SEC) - Beginners' Guide to Financial Statements - consulted July 26, 2026 - Definitions of net earnings and shareholders' equity, used for terminology only, not for benchmarks.
- CFA Institute - Financial Analysis Techniques - ratio analysis and DuPont decomposition - consulted July 26, 2026 - ROE equals net income divided by equity; DuPont breakdown; use the average of beginning and ending equity when a ratio mixes flow and stock figures.
- Aswath Damodaran (NYU Stern) - Returns on Equity by Sector (US) - annual dataset - consulted January 9, 2026 - Damodaran ROE dataset, January 2026 update. Columns: industry, number of firms, ROE unadjusted, ROE adjusted for R&D.
Methodology & Review
Return on Equity (ROE) equals net income available to common shareholders divided by average common equity, expressed as a percentage. Average equity uses the beginning and ending balance-sheet values because ROE mixes an income-statement flow with a balance-sheet stock; CFA's ratio-analysis material recommends this convention. This analyzer computes ROE and then decomposes it via three-factor DuPont: ROE = Net Margin (common net income / revenue) times Asset Turnover (revenue / average total assets) times Equity Multiplier (average total assets / average common equity). It also computes Return on Tangible Common Equity (ROTE) when goodwill and intangibles are supplied, and it classifies the ROE into one of five driver categories: not-meaningfully-interpretable (negative income, zero, negative, or sign-crossing equity), leverage-amplified (high equity multiplier), profitability-led, asset-efficiency-led, or mixed-driver. Diagnostic flags surface material equity change, buyback-driven equity compression, DuPont reconciliation issues, and denominator-driven ROE increases when equity shrinks while income stays roughly stable. When comparison mode is on, the analyzer computes a three-factor Shapley attribution of the ROE change into margin, turnover, and leverage contributions that sum exactly to the total DuPont ROE change within a reconciliation tolerance. RELIABILITY: Reliable for direct ROE and DuPont analysis when equity is stable and positive. Less reliable when equity is near zero, negative, or crosses zero within the period; when book equity is heavily distorted by goodwill (use ROTE); or for cyclical companies (use a multi-year average). Industry benchmarks are Damodaran's annual sector averages, not medians or top-quartile figures.
Reviewed according to the CalcDomain Editorial Policy & Calculator Methodology. We document formulas, edge cases, sources, update dates, and correction paths for calculator pages.
Last updated
Update history
- - v3.0.0 - Rebuilt as ROE Quality Diagnostic with DuPont decomposition, ROTE, leverage flags, driver classification, and Shapley period-attribution.
- - v2.0.0 - Prior generic implementation with sector benchmark table.