Levers of ROE

Return on equity, or ROE, is the most common measure of a company's profitability.

But ROE is itself the product of 3 ratios, or levers:

• net margin (earnings/revenues, expressed as a percentage),
• asset turnover (revenues/assets), and,
• financial leverage (assets/equity).

ROE 

= Net Profit Margin x Asset Turnover X Financial Leverage

= Net Profit/Revenue  x  Revenue/Total Asset  x   Total Asset/Equity

= Net Profit/Equity

Multiplying the three levers together gives us ROE, and raising any one of these three levers will increase ROE.