This study examines the effect of decomposition of return on equity (defined as net income over beginning-of-the-year equity book value) into three components such as profitability, turnover, and leverage on future profitability and value relevance. To the extent that return on equity is expressed as the product of profit margin (defined as net income over sales), asset turnover (defined as sales over beginning-of-the-year total assets) and leverage (defined as beginning-of-the-year total assets over beginning-of-the-year equity book value), logarithmic transformation of return on equity enables us to express return on equity as a linear sum of three components. This linear transformation helps us to examine more directly the relation between return on equity, its decomposed components, and price-to-book ratio. Empirical analysis is performed for non-banking firms (5,372 firm-years) with December fiscal year end listed on Korean Stock Exchange over 1982-2002. Main empirical findings are summarized as follows: (1) the decomposed components of return on equity explain the cross-sectional variation in one-year ahead return on equity and/or cum-dividend price-to-book ratio significantly more than return on equity alone does, (2) profit margin is the most highly associated with one-year ahead return on equity while leverage is the most highly associated with cum-dividend price-to-book ratio, and (3) these results are also confirmed in the industry analysis. It is true that previous studies are not quite helpful in drawing direct inference about the role of individual components of return on equity in their relation to future profitability or value relevance mainly because it is hard to evaluate the effect of each component on future profitability or value relevance due to the multiplicative relation among the components of return on equity. However, the linear relation among the components of return on equity, that is derived by taking natural log of return on equity and its components, makes it possible to explore the relation between return on equity and its components and their role in explaining future profitability and value relevance. Further, we might provide more useful tools of financial statement analysis to users when we focus on industry analysis in depth outlined in this study.