Part 5 · Comparing companies with financial ratios · Lesson 23
ROE: how much does it earn with shareholders' money?
ROE shows how much a company earns in a year on the money shareholders entrusted to it. Even at the same 20%, splitting it into three pieces reveals the company's character.
QToday's question
Three companies all have an ROE of 20%. One has a high profit margin, one sells a huge volume of goods, and one has borrowed heavily. Are all three equally good companies?
ROE is a single number, but three different forces are mixed inside it. This lesson starts with how to calculate ROE, then splits it into three pieces, and finally covers why the Korean market talks about ROE so often.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 9 you saw that KRW 6 billion of equity is made up of share capital, capital surplus and retained earnings; in Lesson 16 you learned about EPS of KRW 600 and a P/E of 15x; and in Lesson 22 you confirmed that Robin Bakery's KRW 1.2 billion of profit also arrives well in cash. Now, in Part 5, we bundle these numbers into ratios to compare companies. You will also meet again the 'P/B = P/E × ROE' relationship from Economics Lesson 37.
- STEP 1 · Basic conceptsROE is the return on shareholders' money
You will be able to calculate from net income and equity, and explain the difference between year-end equity and average equity.
- STEP 2 · Understanding the mechanicsSplitting ROE into three pieces
You will be able to use to split ROE into net margin × × , and explain the risk of ROE built on debt.
- STEP 3 · Real-world applicationThe Korean market and ROE
You will be able to compare the Korean market's ROE with other markets and read how ROE and P/B are connected.
STEP 1ROE is the return on shareholders' money
Just as a deposit has an interest rate, the money shareholders entrust to a company has a return too. Let's start by calculating it.
As you saw in Lesson 9, equity on the balance sheet belongs to shareholders. It is the sum of the money shareholders originally put in (share capital and capital surplus) and the money earned and accumulated since (retained earnings). The ratio showing how much the company earned in a year with this money is (return on equity).
An easy analogy · A bakery started with friends
Three friends pooled KRW 60 million to open a bakery, and after a year, even after paying taxes, KRW 12 million was left. This bakery's ROE is 20%. Had they put the same money in a 3% deposit, they would have earned KRW 1.8 million, so they earned far more in return for the effort and risk of running the shop. ROE is the number that asks, 'Is there a reason to leave this money with this company rather than somewhere else?'
There is one point to flag here. Net income is what was earned over a full year, but equity is a figure for a single day at year-end. Equity at the start of the year was smaller than at the end. Robin Bakery's opening equity is KRW 5.1 billion: the year-end KRW 6 billion, minus this year's KRW 1.2 billion of net income, plus the KRW 300 million paid out as dividends. That is why ROE is sometimes calculated using the average of opening and closing equity.
| Calculation method | Denominator (equity) | ROE | Main use |
|---|---|---|---|
| Year-end equity basis | KRW 6 billion | 20.0% | Quick calculations; the default in this course |
| Average equity basis | (51 + 60) ÷ 2 = KRW 5.55 billion | About 21.6% | Brokerage research, Bank of Korea statistics, etc. |
The two figures differ by 1.6 percentage points. Neither is more correct; what matters is to compare figures calculated the same way. Also, for a company with subsidiaries, as in Lesson 11, the numerator uses and the denominator uses the equity belonging to the parent's owners. In the Robin Coffee scenario, that is 12.6 ÷ 60.6 ≈ 20.8%.
Another ratio often viewed alongside ROE is (return on assets). Its denominator is not equity but total assets, including the debt. Robin Bakery's is 12 ÷ 100 = 12%. ROA shows how much the company earns on all of its assets, while ROE shows how much it earns for shareholders. What makes the two differ is debt, and that is the topic of STEP 2.
Quick checkWhat is the ROE of a company with net income of KRW 600 million and year-end equity of KRW 4 billion? If it paid no dividends and kept all its earnings, would ROE on average equity be higher or lower?
STEP 2Splitting ROE into three pieces
Now it is time to answer today's question. There is more than one way to reach an ROE of 20%.
ROE can be split into the product of three ratios. It is called because the US chemical company DuPont used this method for internal management. If you insert the fractions one by one, they cancel out and return to the original net income ÷ equity.
| Piece | What it shows | Robin Bakery |
|---|---|---|
| Net margin | How much is kept from each sale (Lessons 13–15) | 12 ÷ 120 = 10% |
| How much revenue the company generates from its assets | 120 ÷ 100 = 1.2x | |
| How much debt is stacked on top of its own money (Lesson 10) | 100 ÷ 60 ≈ 1.67x |
The third piece connects directly to the debt-to-equity ratio from Lesson 10. Subtract 1 from financial leverage and you get the debt-to-equity ratio. For Robin Bakery, 1.67 − 1 = 0.67, a debt-to-equity ratio of about 67%. For the same ROA, adding more debt makes ROE larger.
Move the three pieces yourself in the figure below. The three fictional companies all have an ROE of 20%, but they get there in different ways.
ROE
Net margin
How much is kept
× Asset turnover
How fast assets turn over
× Leverage
All of these are fictional companies in this course. 'Debt-boosted ROE' and 'High volume, thin margin' were made up for illustration, with numbers set so that ROE comes to 20% like Robin Bakery. Dark Cloud Electronics has year-3 revenue of KRW 24 billion, net income of KRW 300 million, assets of KRW 25 billion and equity of KRW 5 billion.
The three companies have the same ROE but different risks. Robin Bakery has a high margin and a moderate amount of debt. The high-volume, thin-margin company has a low margin of 2.5%, but goods sell so quickly that it turns over its assets 4.8 times a year. This is common among distributors and food ingredient suppliers. The problem is the debt-boosted ROE company. With a 4% margin and a turnover of 1x, its ROA is only 4%, but it holds assets worth five times its equity (a debt-to-equity ratio of 400%), which inflates ROE to 20%.
What happens to this company in a downturn? If the margin drops from 4% to 1%, ROE falls to 5%. Yet the debt stays the same, and if interest rates rise, interest expense grows and squeezes the margin further. As seen in Economics Lesson 12 and Lesson 8 of this course, debt magnifies losses in bad years just as much as it magnifies returns in good years. Dark Cloud Electronics has 5x leverage yet a margin of only 1.25%, leaving ROE at 6%. It is the worst combination: heavily indebted, with little left over for shareholders.
Common misconceptions
- "The higher the ROE, the better the company, always?"
- No. ROE also rises when a company takes on more debt, or when accumulated losses shrink its equity. A company with very small equity can show an ROE of tens of percent from even a small profit. When looking at ROE, always check the debt-to-equity ratio and the size of equity alongside it.
- "A low ROE means a bad company?"
- A company sitting on a lot of cash can show a low ROE even with good profits, because its equity is large. Such a company is less 'bad at making money' than 'letting the money it earned sit idle'. Returning capital through dividends or share cancellation can raise ROE, which is also why shareholder returns and ROE are discussed together in the Korean market.
- "One year of ROE is enough?"
- In a year that includes the one-off gains of Lesson 15, ROE jumps. It is closer to the truth to look at the 3–5 year average ROE and how its three pieces have changed.
Quick checkWhat are the ROE and the debt-to-equity ratio of a company with a net margin of 5%, asset turnover of 2x and financial leverage of 2x?
STEP 3The Korean market and ROE
How good is Robin Bakery's 20%? Let's put it next to real market figures.
The Korean market's ROE in 2024 was 9.4%, lower than Taiwan (15.6%), India (15.2%) and China (12.0%). In the same analysis, the Korean market's P/B in 2024 was 0.9x. Recall P/B = P/E × ROE from Economics Lesson 37. If P/E is similar, a market with a low ROE inevitably has a low P/B too. This is why low ROE keeps coming up whenever the 'Korea discount' is explained.
The numbers since the Value-up policy tell the same story. According to a Korea Capital Market Institute report, at the end of 2025 the ROE of KOSPI companies that had disclosed a Corporate Value-up Plan was 11.2%, well above that of non-disclosers (4.1%). The same report puts the P/B of KOSPI disclosers in Q1 2026 at 1.9x versus 1.5x for non-disclosers. The interpretation is that more profitable companies joined the disclosure first, and the market is pricing that difference. There were also recent reports that foreign investors are asking companies to present profitability targets such as 'ROE of 8% or higher' alongside their plans (Money Today, 2026-09-24).
Find it yourself on DART
ROE is often not stated separately in the annual report, so you calculate it yourself. 1 Under III. Financial Matters → Consolidated Financial Statements → Consolidated Income Statement, find the net income attributable to 'owners of the parent' near the bottom (the same line used for EPS in Lesson 16). 2 In the equity section of the consolidated balance sheet, write down equity attributable to 'owners of the parent' for the current and prior periods. 3 Calculate ROE as net income ÷ the average of the two years' equity. 4 Using revenue and total assets from the same statements, calculate net margin, asset turnover and leverage, and check which of the three pieces moved ROE. Check the unit above the table first.
How to use it in investing
| If you see this pattern | First check | Where to look together |
|---|---|---|
| ROE suddenly jumps | Which piece rose: net margin, turnover or leverage? | Lesson 10 debt-to-equity ratio, Lesson 15 one-off items |
| ROE is high but so is the debt-to-equity ratio | Can the margin hold up in a downturn or when rates rise? | Lesson 8 interest expense, Lesson 10 interest coverage ratio |
| Earnings are steady but ROE is low | Has cash piled up and only inflated equity? | Lesson 25 dividends, Lesson 16 share cancellation |
| ROE improvement plan disclosure | Target ROE and the means to reach it (margin, shareholder returns) | Economics Lesson 37, Value-up |
Not always. The normal level of ROE differs by industry, and industries with structurally high leverage, such as banks, are hard to compare on the same standard. Market-level ROE can also vary depending on the method of aggregation (which stocks are included, year-end or average equity). ROE is not a criterion for picking stocks; it is a list of questions that prompts you to ask how a company makes its money.
Quick checkTwo companies both have a P/E of 10x. A's ROE is 15% and B's ROE is 6%. Roughly what are their P/B ratios?
✓What we learned today
- ROE = net income ÷ equity. Robin Bakery's is 12 ÷ 60 = 20%: for every KRW 100 shareholders entrusted, it earned KRW 20 in a year.
- If you use the average of opening and closing equity (KRW 5.55 billion) instead of year-end equity, it comes to about 21.6%. When comparing, use figures calculated the same way.
- DuPont analysis: ROE = net margin × asset turnover × financial leverage. Robin Bakery's is 10% × 1.2x × 1.67x = 20%.
- Even at the same ROE of 20%, an ROE built on leverage (debt) is vulnerable to downturns and rising rates. Dark Cloud Electronics has 5x leverage but a low margin, so its ROE stops at 6%.
- The Korean market's ROE was 9.4% in 2024, lower than Taiwan, India and China (Daishin Securities analysis). Since P/B = P/E × ROE, a low ROE tends to lead to a low P/B.
Robin Bakery's P/B is 3x: its P/E of 15x multiplied by its ROE of 20%. The next lesson starts from a BPS of KRW 3,000, equity divided by the number of shares, and looks step by step at what a P/B below 1x means.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Robin Bakery has net income of KRW 1.2 billion and year-end equity of KRW 6 billion. What is its ROE on a year-end basis?
ROE = 12 ÷ 60 = 20%. 12% is ROA, dividing by assets of KRW 10 billion, and 10% is net margin, dividing by revenue.
Q2. In DuPont analysis, which are the three pieces that make up ROE?
ROE = (net income ÷ revenue) × (revenue ÷ assets) × (assets ÷ equity). They stand for how much is kept, how fast assets turn over, and how much debt is added.
Q3. Of two companies with the same ROE of 20%, which one is more worrying in a downturn?
Leverage of 5x means a debt-to-equity ratio of 400%. Even a slight drop in margin sharply lowers ROE, and when interest rates rise, the interest burden grows too.
Q4. Why might a company with steady profits every year but a large cash pile show a low ROE?
If a company keeps the money it earns instead of using it for dividends or investment, retained earnings grow and so does equity. Even if the numerator stays the same, a larger denominator lowers ROE.
Q5. With the same P/E of 15x, roughly what are the P/B ratios of a company with a 20% ROE and one with a 5% ROE?
P/B = P/E × ROE. 15 × 0.20 = 3x and 15 × 0.05 = 0.75x. This is the mechanism by which a low ROE leads to a P/B below 1x.
NextTerms · Next lesson · Related tools
Net income divided by net assets (equity), showing how much shareholders' money earns in a year. The relationship PBR = PER × ROE links the two multiples.
DuPont analysisDuPont analysisA method of splitting ROE into net margin × asset turnover × financial leverage. It lets you tell whether the same ROE was produced by margin, sales speed or debt.
Asset turnoverAsset turnoverRevenue divided by total assets. It shows how many times over the company generates revenue from its assets in a year.
Financial leverageFinancial leverageAssets divided by equity, showing how much debt is stacked on top of the company's own money. Subtract 1 from financial leverage and you get the debt-to-equity ratio. It is a different concept from operating leverage (the effect of fixed costs).
ROA (return on assets)Return on assetsNet income divided by total assets. It shows how much the company earns on all of its assets, including those financed by debt; multiplying ROA by financial leverage gives ROE.
EquityEquityThe shareholders' share, assets minus liabilities, in other words your own money. It consists of share capital, capital surplus, retained earnings and so on.
Net incomeNet incomeThe profit left after everything, including corporate income tax, is deducted. What remains after dividends builds up as retained earnings on the balance sheet, and dividing the parent's share by the number of shares gives EPS.
Debt-to-equity ratioDebt-to-equity ratioLiabilities ÷ equity. It shows how much must be repaid per KRW 100 of shareholders' equity. Averages differ greatly by industry, so compare within the same industry.
P/BPrice-to-Book RatioShare price ÷ book value per share (BPS). It shows how many times the company's book net assets the stock trades at.
P/EPrice-Earnings RatioShare price ÷ EPS. A multiple showing how many times one year's earnings the market pays for a share. It varies greatly with interest rates and investor sentiment.
Profit attributable to owners of the parentProfit attributable to owners of the parentThe share of consolidated net income that goes to the parent company's shareholders. It is the figure after subtracting other shareholders' share of subsidiaries (non-controlling interest), and it is used to calculate EPS.
Put what you learned to use right away
Economics Lesson 37 · P/E and P/B: rulers for measuring expensive vs cheap→Financial Statements Lesson 10 · Judging safety with debt-to-equity and current ratios→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.