The formulas
Gross margin = (revenue − COGS) ÷ revenue. Operating margin = operating income ÷ revenue. Net margin = net income ÷ revenue. ROA = net income ÷ average total assets. ROE = net income ÷ average equity. ROIC = NOPAT ÷ average invested capital, where NOPAT = operating income × (1 − tax rate) and invested capital = interest-bearing debt + equity − cash. Asset turnover = revenue ÷ average assets, equity multiplier = average assets ÷ average equity. Net margin × asset turnover × equity multiplier equals ROE, the DuPont identity, and the tool prints that check.
When to use it
Use it to compare a client with its prior years and with peers, to build an expectation for an analytical procedure, or to see which driver explains a change in ROE. For the full five-step breakdown use the DuPont calculator.
Limits
Ratios depend on accounting policies, so two entities that report differently are not strictly comparable. Average of two balances hides seasonality. Large one-time items in net income distort ROE and ROA unless you adjust them. Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
Should ROE and ROA use average or ending balances?
Average balances match a flow (income earned over the year) to a stock that moved during the year, so they are the usual choice for analysis. Ending balances are common in screening tools. Pick one, say which, and apply it to every period and every peer you compare.
What is the difference between ROA, ROE and ROIC?
ROA divides net income by all assets and ignores how they are financed. ROE divides net income by shareholders’ equity and rises with leverage. ROIC divides after-tax operating profit by the debt and equity that fund operations, so it is not changed by the debt-versus-equity mix.
Why can ROE look high when the company is in trouble?
Because equity is the denominator. Losses, buybacks and dividends shrink equity, so a small profit over a small equity base produces a large percentage. When equity is zero or negative, ROE is not meaningful and the calculator shows a dash.
How do I define invested capital?
This tool uses interest-bearing debt plus equity less cash. Other definitions add lease liabilities or leave cash in. The choice moves ROIC, so state it with the result.
How do auditors use these ratios?
In planning analytical procedures under AU-C 520 to see whether margins and returns fit what you know about the entity, and in going concern evaluations. A margin that moves against the industry or against volume is a prompt to ask why.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.