Return on equity

Return on equity divides net income by average shareholder equity, capturing the return generated specifically for the equity owner. For financial firms — banks, insurers, asset managers — ROE is the headline profitability metric because it directly speaks to the capital regulators require and that shareholders provide. The DuPont decomposition splits ROE into three drivers: net margin (profit per dollar of revenue), asset turnover (revenue per dollar of assets), and financial leverage (assets per dollar of equity). The decomposition is illuminating because the same 15% ROE can be produced by very different business models — a high-margin asset-light operator versus a thin-margin levered franchise — and the durability of each is dramatically different. ROE is also flattered by share buybacks, which reduce the equity denominator without changing the numerator, so a steadily rising ROE alongside steadily rising leverage is less impressive than the headline suggests. We pair ROE with ROIC to separate the contribution from operating performance versus the contribution from capital structure.