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Computerized Investing > First Quarter 2012

Deconstructing ROE: DuPont Analysis

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by Wayne A. Thorp, CFA

Investors use return on equity (ROE) to measure the earnings a company generates from its assets. With it, you can determine whether a firm is a profit-creator or a profit-burner and management’s profit-generating efficiency. Why is this important to investors? Companies that are good at coaxing profits from their operations tend to have competitive advantages, which can translate into superior investment returns.

In its simplest form, return on equity is calculated as follows:

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