Equity · Core
Return on Equity
Return on equity is net income divided by book equity — the accounting yield on residual capital, levered.
Definition
ROE = NI / average book equity. DuPont splits it into margin × turnover × leverage. High ROE from leverage is not the same as high ROE from a franchise. Banks quote ROE as the scoreboard and CET1 as the constraint.
Why it matters
Residual equity is scarce for regulated and covenanted names. ROE vs cost of equity is the simplest value-creation test — if the book is honest.
Case
A retailer levers up, ROE jumps, and ROIC is unchanged. Equity holders earned a leveraged residual until the cycle turned and the same leverage cut both ways.
How to read it
Decompose DuPont. Compare ROE to ROIC and to tangible equity. If AOCI is large, say which equity you used.
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