GLOSSARY
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.
EXAMPLE
Apple (AAPL) has an extraordinary ROE of 157.4%, partly because the company has aggressively bought back shares, reducing its equity base while maintaining high profits. Microsoft (MSFT) has a more typical but still strong ROE of 39.2%.
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RELATED TERMS
Earnings Per Share (EPS)
Net income divided by shares outstanding, representing the profit allocated to each share of common stock.
Book Value
Total assets minus total liabilities, representing the net asset value of a company on its balance sheet.
Fair Value
The estimated intrinsic worth of a stock based on fundamental analysis rather than its current market price.
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DISCLAIMER: This glossary is for educational purposes only and does not constitute financial advice. Fair value calculations are estimates based on models and assumptions. Always conduct your own research and consider consulting a financial advisor before making investment decisions.