i What this calculator does
Return on equity measures how much profit a company produces from the capital shareholders have left in it. It is the single most useful summary of business quality, and the reason a company can justify trading above book value.
The DuPont decomposition splits it into three parts: profit margin, asset turnover and financial leverage. That matters because a high ROE achieved through debt is a different thing from the same ROE achieved through margin.
This calculator is for educational purposes only. Results are estimates and may vary depending on market conditions, spreads, commissions, platform settings, and exchange rates. It should not be considered financial advice.
How to use the Return on Equity Calculator
Every field has a working default, so the calculator produces a result the moment the page loads. Replace the defaults with your own figures and the output updates when you press the button.
- 1. Net Profit (R million)
- 2. Revenue (R million)
- 3. Total Assets (R million)
- 4. Shareholders Equity (R million)
- 5. Cost of Equity (%) For comparison; value is created above this
The result panel reports:
- Return on Equity Profit per rand of equity
- Return on Assets Before the leverage effect
- Value Spread ROE less cost of equity
Alongside the headline figures, the calculator reports net profit margin, asset turnover, financial leverage, cost of equity. Those are the numbers that usually explain why the headline result came out where it did.
The breakdown below the result shows every step of the arithmetic, so you can check the figure rather than trust it. The formula panel names each input as it is used, which is useful if you want to reproduce the calculation in a spreadsheet.
Frequently asked questions
What is a good ROE?
Above the cost of equity, which in South Africa is often 15% to 18%. A company earning 12% on equity while its shareholders require 16% is destroying value even though it is profitable. That spread matters more than the absolute figure.
Why does DuPont matter?
Because two companies can report the same ROE for very different reasons. One earns it through high margins; another through borrowing heavily. The first is a quality business; the second is a leveraged one, and they behave very differently in a downturn.
Can ROE be too high?
It can be misleadingly high. Heavy buybacks shrink equity and inflate the ratio. So does a large write-down. An ROE well above the sector is worth investigating rather than celebrating, and the leverage multiplier usually explains it.
Should I use opening, closing or average equity?
Average equity over the period is the technically correct choice, because the profit was earned across the year. Closing equity is what most quoted figures use. The difference matters most for companies that raised or returned capital during the year.
How does ROE relate to price to book?
A company earning more on its equity than shareholders require should trade above book value, and the premium should rise with the spread. That relationship is the theoretical link between the two ratios.
Does ROE work for banks?
Yes, and it is the standard measure for them. Bank leverage is far higher than in industrial companies by the nature of the business, so comparisons should stay within the sector.
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