The Return on Equity, or ROE, measures how efficiently a company uses Shareholders’ Equity to generate profits. It is calculated as the Net Profit for the year, divided by Average Book Value, or Equity, for the period.
\( \text{ROE}=\frac{\text{Net Income}}{\text{Book Value}} \)
\( \text{Book Value}=\text{Total Assets}-\text{Total Liabilities} \)
This is defined as Income available to Common Shareholders (excluding Extraordinaries) divided by the Average Book Value over the period.
The DuPont formula is a common way to break down ROE into three important components. Essentially, ROE will equal the Net Margin multiplied by Asset Turnover multiplied by Financial Leverage.