Return on Equity (ROE)

Return on Equity (ROE) measures how efficiently a company converts shareholder equity into profit. It is calculated by dividing net income by shareholder equity and expressing the result as a percentage.

ROE answers the question: for every dollar shareholders have invested in this company, how much profit does it generate? A higher ROE indicates more efficient use of equity capital.

Interpreting ROE

Generally, an ROE above 25% is considered exceptional and indicates a highly profitable business with strong competitive advantages. An ROE between 15% and 25% is strong. Below 15% is average to weak, though this varies significantly by industry.

Capital-intensive industries like utilities and manufacturing naturally have lower ROE because they require substantial assets. Asset-light businesses like software companies can achieve very high ROE because they need minimal physical assets to generate profit.

Very high ROE can sometimes be artificially inflated by high debt levels or aggressive share buybacks that reduce the equity base. Always examine the underlying drivers of unusually high ROE figures.