Is Goldman Sachs Group Inc (NYSE: GS) Management Manufacturing ROE?


Goldman Sachs Group Inc (NYSE: GS) delivered a below average 5.8% ROE over the past year, compared to the 8.4% return generated by the Financials sector. Goldman’s results may indicate management is running an inefficient business relative to its peers, which may very well be the case, but it is important to understand what ROE is made up of and how it should be interpreted. Knowing these components may change your view on Goldman’s performance and future prospects. I show you exactly what I mean in my DuPont analysis below.

How To Calculate Goldman’s ROE

Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Return on Equity or ROE is generally calculated using the following formula:

ROE = Net Income To Common / Average Total Common Equity

ROE is a helpful metric that illustrates how effective the company is at turning the cash put into the business into gains or returns for investors. However, it is important to note that ROE can be “manufactured” by management with the use of leverage or debt.

The return on equity achieved by Goldman over the last few years is shown below.

Goldman's ROE Trends Chart

source: data explorer – ROE

It appears that the return on equity of Goldman has generally been increasing over the last few years. ROE increased from 7.5% to 9.4% in fiscal year 2016, decreased to 5.0% in 2017 and increased to 5.8% as of LTM Mar’18. So what’s causing the general improvement?

Understanding Goldman’s Improving Return On Equity

The DuPont analysis is another way to calculate a company’s ROE using the following three metrics:

Return on Equity = Net Profit Margin * Asset Turnover * Equity Multiplier

Analyzing changes in these three items over time allows investors to figure out if operating efficiency, asset use efficiency or the use of leverage is what’s causing changes in ROE. Strong companies should have ROE that is increasing because its net profit margin and/or asset turnover is increasing. On the other hand, a company may not be as strong as investors would otherwise think if ROE is increasing from the use of leverage or debt.

So what exactly is causing Goldman’s improving returns?

Net Profit Margin Trends

It appears that the net profit margin of Goldman has generally been increasing over the last few years. Margins increased from 16.5% to 23.2% in fiscal year 2016, decreased to 11.5% in 2017 and increased to 12.5% as of LTM Mar’18.

GS Net Profit Margin Trends

source: data explorer – net profit margin

Therefore, the company’s increasing margins help explain, at least partially, why ROE is also increasing. Now let’s take a look at Goldman’s efficiency performance to see if that is also boosting ROE.

Asset Turnover Trends

It appears that asset turnover of Goldman has generally been increasing over the last few years. Turnover decreased from 0.04x to 0.04x in fiscal year 2016, increased to 0.04x in 2017 and increased again to 0.04x as of LTM Mar’18.

GS Asset Turnover Trends

source: data explorer – asset turnover

Therefore, the company’s increasing asset turnover ratio helps explain, at least in part, why ROE is also increasing.

Finally, the DuPont constituents that make up Goldman’s ROE are shown in the table below. Note that the table also compares Goldman to a peer group that includes Morgan Stanley(NYSE: MS), Citigroup Inc. (NYSE: C), The Charles Schwab Corporation (NYSE: SCHW) and Bank of America Corporation (NYSE: BAC).

GS ROE Breakdown vs Peers Table - DuPont Analysis

source:’s DuPont model

In conclusion, the DuPont analysis has helped us better understand that Goldman’s general improvement in return on equity is the result of an improving net profit margin, an improving asset turnover ratio and increasing leverage. Therefore when looking at the core operations of the business, Goldman shareholders have reason to be excited due to the company’s general improvement in profitability along with a general improvement in operational efficiency and increasing leverage.

The DuPont approach is a helpful tool when analyzing how well management is utilizing shareholder capital. But before making an investment decision, I recommend you continue to research Goldman to get a more comprehensive view of the company by looking at:

Valuation Metrics: what is Goldman’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

Risk Metrics: what is Goldman’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Goldman’s return on equity here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial technology, analyzing market trends. Brian is a founder at, where he’s focused on building tools that make it faster and easier for investors to research stock fundamentals. Brian’s background is in physics & computer science and previously worked as a software engineer at GE Healthcare. He enjoys applying his expertise in technology to help find market trends that impact investors. Brian can be reached at or at +1 (516) 778-6257.

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