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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat ROE measures
ROE is the return the business earns for its shareholders after interest and tax. The DuPont view splits it into drivers, which shows where a strong or weak ROE comes from.
1
Net profit: profit after interest and tax, the earnings that belong to shareholders.
2
Shareholders' equity: share capital plus reserves and retained earnings, from the balance sheet.
3
Net margin and asset turnover: the profit earned on each rupee of sales, and the sales earned on each rupee of assets.
4
Equity multiplier: total assets ÷ equity. More debt raises it, and with it both ROE and risk.
A high ROE is not always good news. It can come from strong margins, or from heavy borrowing on a thin equity base. Read it alongside the debt-to-equity ratio.
When to use ROE
ROE answers what shareholders earn. For how well the business uses all its capital, including debt, return on capital employed is the better measure.
WHAT CHANGES
Use ROE
Use ROCE
Question asked
What do owners earn on their money?
What does all capital earn?
Comparing companies
Similar leverage and business model
Very different levels of debt
Funding decisions
Effect of new equity versus debt
Whether the asset itself pays
Sensitive to debt
Yes, strongly
Much less
How to calculate ROE
ROE = net profit ÷ shareholders' equity × 100. The DuPont view gives the same answer in three parts: net margin × asset turnover × equity multiplier, or (profit ÷ revenue) × (revenue ÷ assets) × (assets ÷ equity).
Use average equity.
Profit is earned over the year, so divide by the average of opening and closing equity. This matters in a year with a large fund-raise, buyback or loss.
Watch the multiplier.
If ROE rises only because the equity multiplier rose, the gain came from leverage, not better operations. Lease liabilities under Ind AS 116 also raise total assets and the multiplier.
When equity is negative or very small, ROE stops being meaningful. Use other measures instead.
Where ROE shows up
Breaking down a QSR chain's ROE
ILLUSTRATIVE
A QSR chain earns net profit of ₹12 crore on revenue of ₹200 crore, a 6% margin. It has total assets of ₹160 crore and shareholders' equity of ₹80 crore, so asset turnover is 1.25 and the equity multiplier is 2. ROE is 6% × 1.25 × 2 = 15%, the same as ₹12 crore ÷ ₹80 crore. For 20 new outlets, the CFO compares raising equity for the fit-outs with leasing them. New equity enlarges the denominator. Leasing leaves equity unchanged but adds lease costs and, under Ind AS 116, a lease liability. DuPont shows which lever each option moves.