ROE, ROA and ROCE Calculator

How hard a business makes its money work: return on equity, on total assets and on capital employed, with the DuPont breakdown of ROE into margin, asset turnover and leverage.

ROE, ROA, ROCE and DuPont

Same profit, same assets, different funding

Three returns, and what the DuPont breakdown adds

Each ratio divides a profit by the money that produced it, and the choice of pair matters. Return on equity is net profit over the shareholders’ money: what the owners earn. Return on assets is net profit over everything the business owns, however it was financed. Return on capital employed is operating profit — before interest and tax — over the long-term money in the business, equity plus long-term borrowing, which makes it the fairest way to compare businesses funded differently. In the example ROE is 15%, ROA 9% and ROCE 20%.

The DuPont method, used in the OpenStax finance text, splits ROE into three multiplied parts: the net profit margin (how much of each sale is profit), asset turnover (how much revenue each rupee of assets generates) and the equity multiplier (how much of the assets the owners paid for). Here 7.5% × 1.2 × 1.67 gives the same 15%. Two businesses with the same ROE can get there very differently — a jeweller on thin margins and fast turnover, a software firm on fat margins — and the third term shows how much of the return comes from debt. Borrowing raises ROE when the business earns more on its assets than the debt costs, and deepens losses when it does not, which is why a high ROE with a high equity multiplier deserves a second look.

Use averages of the opening and closing balance sheets, as the textbooks do, so a big change during the year does not distort the result; year-end figures are a common shortcut. Definitions of capital employed vary: some texts use total assets minus current liabilities, others equity plus all interest-bearing debt, and some take averages. Keep one definition when comparing years or companies. ROE means nothing when equity is negative, and none of these ratios has a universal “good” level; compare within an industry. For a quoted share, the P/E ratio calculator looks at the same profit from the price side, and the ROI calculator works out the return on your own investment. This is arithmetic on the figures you enter, not financial advice.

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References

1. Dahlquist J, Knight R. Principles of Finance. OpenStax, Rice University, 2022. Section 6.2 (operating efficiency: inventory turnover = cost of goods sold ÷ average inventory; receivables turnover = credit sales ÷ average receivables), section 6.4 (solvency: debt-to-assets = total liabilities ÷ total assets; debt-to-equity = total liabilities ÷ total stockholders’ equity; times interest earned = EBIT ÷ interest expense) and section 6.6 (return on assets and on equity on average balances; the DuPont method: profit margin × total asset turnover × equity multiplier).
2. Atrill P, McLaney E. Accounting and Finance for Non-Specialists. Pearson. Return on capital employed = operating profit ÷ (share capital + reserves + non-current liabilities) × 100; return on ordinary shareholders’ funds; gearing. Definitions of capital employed vary between texts and companies.