# What Is Return on Equity?

Published: 2026-03-02
Author: Warren Team
URL: https://www.heywarren.com/blog/calculate-roe

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Warren Buffett has publicly stated he looks for businesses that consistently earn a return on equity above 15%, and that single filter has anchored one of the greatest wealth-building track records in history. Yet most investors glance at this number without truly understanding what it measures or how to calculate ROE accurately from scratch.

The problem is that return on equity looks deceptively simple on the surface. Pull the wrong figure from a balance sheet, or ignore how debt inflates the ratio, and you can walk away with a wildly misleading picture of how efficiently a company generates profit for its owners.

In this guide, you will learn the exact formula for ROE, how to run the calculation using real financial statements, what benchmarks to use when judging the result, and the common mistakes that cause even experienced analysts to misread it. By the end, you will be able to calculate ROE for any public company and interpret it with genuine confidence.

The S&P 500's median return on equity has hovered between 14% and 18% over the past decade, a concrete benchmark you can use immediately.

## What Is Return on Equity?

[Return on equity (ROE)](/blog/return-on-equity) measures how much net profit a company generates for every dollar of shareholders' equity. Expressed as a percentage, it answers one fundamental question: how efficiently is management turning owners' capital into earnings? A higher ROE generally signals stronger performance, though industry context, debt levels, and consistency always shape the interpretation.

ROE sits at the intersection of two financial statements. Net income comes from the income statement; shareholders' equity, also called stockholders' equity or book value, comes from the balance sheet. Together, they reveal whether a business is creating or eroding value for the people who own it.

**Shareholders' equity** is what remains after subtracting total liabilities from total assets. Think of it as the owners' residual stake. If a company holds $500 million in assets and carries $300 million in liabilities, shareholders' equity is $200 million.

**Net income** is the profit left after all operating expenses, interest, and taxes have been paid. It is the bottom line on the income statement, not [operating income](/blog/formula-for-operating-income), not EBITDA, and not gross profit.

The relationship between these two figures tells investors whether management is a good steward of capital or whether it is burning through the owners' money without adequate return.

## How to Calculate ROE: The Formula Step by Step

To calculate ROE, divide a company's net income by its average shareholders' equity, then multiply by 100 to express the result as a percentage. Using average equity, the mean of beginning-of-year and end-of-year equity, smooths out unusual capital events that could distort a single snapshot.

![Three steps to calculate return on equity from a company's financial statements.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20875%20125%22%20width%3D%22875%22%20height%3D%22125%22%20role%3D%22img%22%3E%3Ctitle%3EFlow%20diagram%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%2230%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22115%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ENet%20Income%3C%2Ftext%3E%3Ctext%20x%3D%22115%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3EIncome%20statement%3C%2Ftext%3E%3Cline%20x1%3D%22205%22%20y1%3D%2262.5%22%20x2%3D%22237%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22244%2C62.5%20235%2C57.5%20235%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22245%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22330%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EAvg%20Equity%3C%2Ftext%3E%3Ctext%20x%3D%22330%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3E%28Start%20%2B%20End%29%20%C3%B7%202%3C%2Ftext%3E%3Cline%20x1%3D%22420%22%20y1%3D%2262.5%22%20x2%3D%22452%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22459%2C62.5%20450%2C57.5%20450%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22460%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22545%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EDivide%3C%2Ftext%3E%3Ctext%20x%3D%22545%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3ENet%20Income%20%C3%B7%20Avg%20Equity%3C%2Ftext%3E%3Cline%20x1%3D%22635%22%20y1%3D%2262.5%22%20x2%3D%22667%22%20y2%3D%2262.5%22%20stroke%3D%22%2364748b%22%20stroke-width%3D%222%22%2F%3E%3Cpolygon%20points%3D%22674%2C62.5%20665%2C57.5%20665%2C67.5%22%20fill%3D%22%2364748b%22%2F%3E%3Crect%20x%3D%22675%22%20y%3D%2225%22%20width%3D%22170%22%20height%3D%2275%22%20rx%3D%2210%22%20fill%3D%22white%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22760%22%20y%3D%2258.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EROE%20%25%3C%2Ftext%3E%3Ctext%20x%3D%22760%22%20y%3D%2278.5%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2211%22%20fill%3D%22%2364748b%22%3E%C3%97%20100%3C%2Ftext%3E%3C%2Fsvg%3E)

*Three steps to calculate return on equity from a company's financial statements.*

**The ROE formula:**

ROE = (Net Income ÷ Average Shareholders' Equity) × 100

### Step 1: Find Net Income

Open the company's income statement (also called the [profit and loss statement](/blog/example-of-pl-statement)). Net income is the final line, after operating expenses, interest expense, and income taxes have all been deducted. For Apple's fiscal year 2023, net income was approximately $97 billion.

Do not substitute operating income or EBITDA here. Both figures omit interest and taxes, so using them will overstate the result and produce a number that is not comparable across companies.

### Step 2: Calculate Average Shareholders' Equity

Go to the balance sheet. Record shareholders' equity at the start of the fiscal year and at the end. Add the two figures and divide by two.

For example:
- Beginning equity: $60 billion
- Ending equity: $70 billion
- Average equity: ($60B + $70B) ÷ 2 = **$65 billion**

If only one period's data is available, common with newly public companies, a single-period figure is acceptable, though average equity is always the more precise approach.

### Step 3: Divide and Express as a Percentage

Divide net income by average equity, then multiply by 100.

Using Apple's approximate figures:
- Net income: $97 billion
- Average equity: ~$62 billion (suppressed by share buybacks)
- ROE: ($97B ÷ $62B) × 100 ≈ **156%**

That eye-popping number is not an error. Apple's aggressive buyback program has reduced its book equity to a very low level, which mathematically amplifies ROE. This is precisely why interpreting the ratio requires context, and why the next sections matter as much as the arithmetic.

## What Is a Good ROE? Benchmarks by Sector

A "good" ROE varies by industry, but as a general rule, a return on equity above 15% is considered strong for most sectors, and anything consistently above 20% signals a durable competitive advantage. The S&P 500's long-run median ROE has ranged from 14% to 18%, making that band a practical baseline for diversified investors.

Different industries carry structurally different ROE levels, and comparing across sectors is one of the most common analytical mistakes.

**Typical ROE ranges by sector (approximate, 2022–2024):**

- **Technology:** 25%–50% (asset-light models, high margins, strong pricing power)
- **Financial services / banks:** 10%–15% (heavily regulated, leveraged balance sheets)
- **Utilities:** 8%–12% (capital-intensive, rate-regulated revenue)
- **Retail:** 15%–30% (varies widely based on inventory efficiency and private-label mix)
- **Healthcare / pharma:** 20%–35% (intellectual property moats, pricing power)

A bank posting 12% ROE may be outperforming its peers while a software company posting the same number should be asking hard questions about its business model.

**Consistency matters as much as the absolute level.** A company that earns 18% return on equity for ten consecutive years is far more valuable than one that posts 30% one year and 5% the next. Always examine the five-year average ROE alongside the most recent figure. Steady compounding is the engine of long-term wealth creation.

Negative ROE, produced when a company reports a net loss, signals that shareholders' equity is being eroded. Sustained negative ROE is a serious warning sign, though a single loss year in a cyclical industry is not automatically alarming.

## ROE vs. ROA and ROCE: Choosing the Right Ratio

ROE measures profit relative to equity, ROA measures profit relative to total assets, and ROCE measures profit relative to all long-term capital including debt. Each ratio answers a different question, and sophisticated analysts use all three together to build a complete picture of a company's financial health.

### Return on Assets (ROA)

ROA = Net Income ÷ Total Assets

ROA removes the effect of financial leverage. If two companies show identical ROE but one carries significant debt, ROA will reveal that the leveraged company is actually less efficient at deploying its physical and financial resources. For banks and capital-intensive businesses, ROA is often considered the more reliable profitability metric.

A healthy ROA for non-financial companies typically falls between 5% and 10%. Apple's ROA was roughly 28% in fiscal 2023, reflecting extraordinary asset efficiency.

### Return on Capital Employed (ROCE)

ROCE = EBIT ÷ Capital Employed (Total Assets − Current Liabilities)

ROCE is favored by value investors who want to assess how effectively a company uses all its long-term capital, both equity and debt. It is especially useful when comparing capital-intensive businesses like oil producers, manufacturers, or infrastructure companies where permanent debt financing is structurally normal.

### When to Use Each Metric

- Use **ROE** when evaluating management's efficiency with shareholders' money.
- Use **ROA** when comparing companies that carry very different amounts of debt.
- Use **ROCE** when analyzing industries where long-[term borrowing](/blog/term-borrowing) is a permanent feature of the business model.

## The DuPont Analysis: Breaking Down What Drives ROE

The DuPont framework decomposes ROE into three component ratios, revealing the specific drivers behind the headline number. This method was developed by DuPont Corporation in the 1920s and remains one of the most powerful tools for understanding whether a high ROE reflects genuine operational excellence or simply financial engineering.

![The three-factor DuPont decomposition splits ROE into margin, efficiency, and leverage components.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20600%20211%22%20width%3D%22600%22%20height%3D%22211%22%20role%3D%22img%22%3E%3Ctitle%3EHierarchy%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%2220%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%2254%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3EROE%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20120%20105.5%20L%20120%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%2240%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22120%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ENet%20Profit%20Margin%3C%2Ftext%3E%3Ctext%20x%3D%22120%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ENet%20Income%20%C3%B7%20Revenue%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20300%20105.5%20L%20300%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EAsset%20Turnover%3C%2Ftext%3E%3Ctext%20x%3D%22300%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3ERevenue%20%C3%B7%20Assets%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20480%20105.5%20L%20480%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22400%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22480%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EEquity%20Multiplier%3C%2Ftext%3E%3Ctext%20x%3D%22480%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EAssets%20%C3%B7%20Equity%3C%2Ftext%3E%3C%2Fsvg%3E)

*The three-factor DuPont decomposition splits ROE into margin, efficiency, and leverage components.*

The three-factor [DuPont formula](/blog/dupont-formulas):

**ROE = Net Profit Margin × Asset Turnover × Equity Multiplier**

Where:
- **Net Profit Margin** = Net Income ÷ Revenue (profit generated per sales dollar)
- **Asset Turnover** = Revenue ÷ Average Total Assets (sales generated per asset dollar)
- **Equity Multiplier** = Average Total Assets ÷ Average Shareholders' Equity (degree of leverage)

### Why the Equity Multiplier Matters

A company can boost its return on equity simply by taking on more debt, which reduces equity and inflates the equity multiplier. This is not inherently bad, a business borrowing at 5% and earning 15% on those funds is being intelligent about capital structure. But a company propping up ROE purely through leverage while operating margins compress is building on an unstable foundation.

When you encounter a surprisingly high ROE, run the DuPont decomposition immediately. If the equity multiplier is doing nearly all the work and profit margins are thin, proceed with caution.

### A DuPont Comparison in Practice

Consider two retailers that report identical 25% ROE:

**Company A:** 5% net margin × 2.0 asset turnover × 2.5 equity multiplier = **25% ROE**
**Company B:** 10% net margin × 2.5 asset turnover × 1.0 equity multiplier = **25% ROE**

Company B generates its return entirely through operating efficiency with zero leverage. Company A relies heavily on debt. Company B's ROE is more durable, less sensitive to rising interest rates, and more likely to persist through an economic downturn.

## Common Mistakes When Calculating and Interpreting ROE

Calculating ROE is straightforward arithmetic, but misinterpreting the result is extremely common. The most frequent errors involve using the wrong equity figure, ignoring one-time income items, and failing to account for the structural role of debt, each of which can lead investors to dramatically misjudge a company's true profitability.

![Two retailers with identical 25% ROE, Company B achieves it through operating efficiency with no leverage.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20800%20210%22%20width%3D%22800%22%20height%3D%22210%22%20role%3D%22img%22%3E%3Ctitle%3EComparison%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Ctext%20x%3D%22230%22%20y%3D%2257.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ECo.%20A%20%28leveraged%29%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%2225%22%20width%3D%22450%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22702%22%20y%3D%2257.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%232563eb%22%3E%2525%3C%2Ftext%3E%3Ctext%20x%3D%22230%22%20y%3D%22152.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3ECo.%20B%20%28efficient%29%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%22120%22%20width%3D%22450%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%237c3aed%22%2F%3E%3Ctext%20x%3D%22702%22%20y%3D%22152.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%237c3aed%22%3E%2525%3C%2Ftext%3E%3C%2Fsvg%3E)

*Two retailers with identical 25% ROE, Company B achieves it through operating efficiency with no leverage.*

**Using ending equity only.** Plugging in year-end equity rather than the average of beginning and ending equity distorts the calculation, especially when a company raised capital mid-year or paid a large special dividend. Always average the two periods.

**Including non-recurring income.** A company that sold a division and booked a $400 million gain will show inflated net income for that year. Its ROE will spike, but the spike is not repeatable. Strip out large one-time items, asset sales, litigation settlements, restructuring charges, before drawing conclusions about sustainable earnings power.

**Treating negative equity as a positive signal.** When accumulated losses or aggressive share buybacks have driven equity negative, the ROE formula produces a mathematically nonsensical positive number (a negative divided by a negative). McDonald's has carried negative book equity for years due to buybacks. In such cases, ROE is essentially meaningless and should be replaced with ROA or ROCE for analytical purposes.

**Comparing across industries.** A 12% ROE for a regulated utility is excellent. A 12% ROE for a cloud software company is a serious underperformance. Always benchmark against sector peers.

**Ignoring trend direction.** A company whose ROE has declined from 22% to 14% over five years may be a worse investment than one whose ROE has risen from 10% to 16% over the same period, even though the snapshot comparison favors the first company. Trajectory matters.

## How Investors Use ROE to Screen and Value Stocks

Experienced investors use return on equity as a first-pass screening tool to identify companies that consistently compound shareholder value. The most effective approach combines a minimum ROE threshold with trend analysis and DuPont decomposition to separate high-quality compounders from leveraged illusions.

**Buffett's 15% rule.** Berkshire Hathaway's investment checklist has historically included a preference for businesses with return on equity consistently above 15% without excessive debt. The compounding logic is powerful: a company earning 20% on equity and reinvesting its earnings grows book value by approximately 20% per year. Over a decade, that translates to roughly 520% growth in book value, even before any expansion in valuation multiples.

**A practical five-step screening process:**

1. Filter for companies with a **5-year average ROE ≥ 15%**
2. Verify the equity multiplier is **below 3.0** to limit leverage distortion
3. Confirm **net profit margin has been stable or expanding** over the same period
4. Check that **revenue has grown**, rising ROE on flat revenue may signal financial engineering rather than genuine improvement
5. Compare the result to **industry peers**, not the broad market average

These screens are available on financial data platforms including Morningstar, Finviz, and Bloomberg Terminal.

**ROE's limitations as a standalone number.** ROE says nothing about valuation. A stock with 25% ROE trading at 50x earnings may be a worse investment than a stock with 12% ROE trading at 8x book value. Always combine ROE with price-to-earnings (P/E), price-to-book (P/B), and [free cash flow](/blog/cashflow-free) yield before reaching a buy or sell conclusion.

## Authoritative Sources

For deeper background and primary-source data on this topic, the following authoritative sources are useful starting points:

- [IRS](https://www.irs.gov/)
- [SEC](https://www.sec.gov/)
- [Federal Reserve](https://www.federalreserve.gov/)
- [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/)
- [U.S. Department of the Treasury](https://home.treasury.gov/)
- [Bureau of Labor Statistics](https://www.bls.gov/)

## Conclusion

Return on equity is one of the most informative single numbers in financial analysis, but only when you understand what drives it and how to interpret it honestly.

Here are the key takeaways:

- **The formula:** ROE = (Net Income ÷ Average Shareholders' Equity) × 100. Always use average equity, not year-end equity alone.
- **Context is everything:** A 15% ROE is strong in utilities and mediocre in technology. Compare within the same sector.
- **Debt can flatter the number:** The DuPont decomposition reveals whether ROE reflects genuine operating efficiency or financial leverage. Check the equity multiplier before drawing conclusions.
- **Consistency beats peak performance:** A company earning 17% return on equity for a decade is a far better business than one spiking to 35% and crashing to 5%.
- **Negative equity distorts the ratio:** When book equity turns negative due to buybacks or accumulated losses, switch to ROA or ROCE for analysis.
- **One-time items mislead:** Strip non-recurring gains and charges from net income before you calculate ROE and compare it across time periods.

The next time you calculate ROE for a company you are researching, spend five additional minutes running the DuPont decomposition and charting the five-year trend. That one extra step separates informed investors from those reading a single number in isolation.

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