Return on Equity Calculator

Return on Equity — How Efficiently Is Capital Deployed?

Return on Equity (ROE) measures how much profit a company generates per rupee of shareholders' equity. An ROE of 20% means for every ₹100 of equity on the balance sheet, the company earns ₹20 in net profit. This is the single most important profitability metric for equity investors because it directly measures returns on your capital.

Warren Buffett's filter — businesses he has cited repeatedly — is sustained ROE above 15% with low or no debt. In the Indian context, companies that maintain 18%+ ROE across market cycles tend to be compounders: Asian Paints, HDFC Bank, Pidilite Industries, Berger Paints, Abbott India. These are not accidents — high ROE reflects structural competitive advantage.

DuPont Decomposition — Three Drivers of ROE

The DuPont framework breaks ROE into three components: net profit margin, asset turnover, and financial leverage. This decomposition tells you why ROE is what it is, and whether it is sustainable.

Consider two companies both with 18% ROE. Company A achieves it through a 15% net margin, 0.8x asset turnover, and 1.5x leverage — this is a high-quality, low-leverage business. Company B gets to 18% via a 3% net margin, 2x asset turnover, and 3x leverage — thin margins, high churn, and leveraged. Same ROE, dramatically different quality. DuPont reveals which you are actually buying.

• Asian Paints FY24: ~22% ROE via 13% margin + strong turnover + low leverage (quality)
• Large steel companies: 15–18% ROE via thin margins + high turnover + leverage (cyclical)
• NBFCs: 15–20% ROE via moderate margins + low turnover + high leverage (financial leverage-driven)

ROE Benchmarks by Sector in India

Not all sectors can generate the same ROE. Capital-intensive sectors like utilities and metals have inherently lower ROEs because the asset base is enormous. Services businesses and consumer brands can sustain high ROEs with minimal capital. Comparing ROE across sectors without this context produces misleading conclusions.

ROE vs ROCE — Which One to Use?

ROE measures returns on equity capital. ROCE measures returns on all capital employed — both equity and debt. For debt-free companies, ROE and ROCE are nearly identical. For leveraged companies, they diverge — and ROCE gives the truer picture of operational efficiency.

A company borrowing heavily can artificially inflate ROE through leverage. If you see an ROE of 25% but ROCE of only 10%, the business itself is generating mediocre returns. The gap is being bridged by borrowed money. This is not inherently bad — banks and NBFCs operate this way by design — but for industrial companies, a large ROE-ROCE gap is a warning sign.

Screen for companies where both ROE and ROCE exceed 15%, with ROE-ROCE gap under 5%. This combination indicates a genuinely profitable business that is not relying on debt to flatter its equity returns.