The same ROE, two different companies
The DuPont decomposition turns return on equity into a product of three things: net margin, asset turnover and the equity multiplier. They multiply back to the ROE exactly, and the point of splitting them is that it shows where the return came from.
There are several ways to reach 20%. One company has a 20% margin, turnover of 0.625 and leverage of 1.6. Another has a 5% margin, turnover of 0.8 and leverage of 5. Both report 20%. The first sells something with pricing power; the second is running on borrowed money. They are not the same investment.
A return built on leverage is better in good years and much worse in bad ones. While return on assets exceeds the borrowing rate, debt lifts the ROE; when that relationship inverts, the same leverage magnifies the loss. That is why this tool shows ROA beside it.
Period-end figures or averages
Net income is a year of earnings; total assets and equity are balances on one date. Dividing a flow by a point-in-time balance is the awkward part, and the textbook answer is to average the opening and closing balances.
In practice the closing balance is used more often. Where the asset base does not swing much, the difference is small, and the comparison holds as long as every company is treated the same way. Consistency is what matters: an average for one company and a year-end for another makes the two numbers incomparable.
A year with a share issue or a large acquisition is the exception. If closing equity is far above the average held through the year, the ROE comes out low and the company looks less profitable than it was. Where equity moved more than about 20%, use the average.
When an ROE stops meaning anything
Where equity is negative, an ROE cannot be read. Liabilities exceed assets, and even a profitable year returns a negative figure. This tool shows it rather than hiding it, but it is not a number to put beside another company's ROE.
Heavy share buybacks distort it too. Buying back stock reduces equity, so the denominator shrinks and the ROE rises on unchanged earnings. Nothing about the business improved. Looking at ROA alongside it separates the two.
To judge an ROE in absolute terms, compare it with the cost of equity. While the return exceeds it, shareholder capital is creating value; below it, the company is earning something but not enough to cover what the capital costs. Whether 8% is good depends entirely on whether the cost of equity is 6% or 12% — the WACC calculator on this site gives the CAPM figure to put beside it.