How this calculator works
Separate return on equity into profit margin, asset turnover and financial leverage. Use the same period for income and sales and consistent average balances for assets and common equity. The component view shows whether earnings efficiency, asset use or leverage is driving the reported return.
Formula
ROE = (net income / sales) × (sales / average assets) × (average assets / average common equity) = margin × turnover × equity multiplier.
Worked example
$100,000 net income, $1,000,000 sales, $500,000 assets and $250,000 equity give a 10% margin, turnover of 2, leverage of 2 and 40% ROE. A 5% margin, turnover 1.5 and leverage 2 give 15% ROE.
Advertisement
Frequently asked questions
Why do the three components multiply to ROE?
Sales and assets cancel algebraically, leaving net income divided by common equity when the definitions match.
Can I use negative earnings?
Yes. Negative margin produces negative ROE with positive assets and equity.
Is high leverage a sign of good operations?
Leverage can increase ROE without improving margins or asset use. It also increases financing risk.