Return on Equity (ROE)
Net income as a percentage of shareholders' equity. Measures how efficiently a company turns shareholder capital into profit.
Formula
ROE = Net Income ÷ Average Shareholders' Equity × 100
Return on equity (ROE) measures how much profit a company generates for every dollar of shareholders' equity: net income divided by average shareholders' equity. It is the headline gauge of how effectively management compounds the capital owners have entrusted to the business.
A sustained high ROE (broadly, 15%+) signals a durable competitive advantage — the company reinvests at attractive rates and grows book value quickly, which is why high-ROE compounders command premium valuations. But ROE can be inflated by leverage: because equity is the denominator, loading up on debt or buying back stock shrinks equity and mechanically lifts ROE without any real operating improvement.
That's why analysts decompose it via the DuPont framework: ROE = net margin × asset turnover × financial leverage. A high ROE driven by margins and efficiency is high-quality; one driven mostly by debt is fragile. Compare ROE against return on invested capital (ROIC) to see how much of the return is real versus borrowed.
Example
A company earns $600M in net income on $3.0B of average shareholders' equity. ROE = $600M ÷ $3.0B = 20%. If a peer posts the same 20% ROE but carries far more debt, its quality is lower — the leverage, not the operations, is doing the work.
Related Terms
Book Value
Total assets minus total liabilities on the balance sheet — what shareholders would theoretically receive if the company were liquidated today.
IntermediateDividend Payout Ratio
The share of earnings paid out as dividends. A low ratio leaves room to grow the dividend; a very high one signals fragility.
IntermediateEPS (Earnings Per Share)
Net income divided by shares outstanding. EPS is the single most-watched earnings metric for valuing a stock.
BeginnerOperating Margin
Operating income as a percentage of revenue. Shows how much profit the core business earns before interest and taxes.
IntermediatePrice-to-Book (P/B) Ratio
Share price divided by book value per share. Shows how much you pay per dollar of accounting net worth.
IntermediateReturn on Investment (ROI)
Net profit as a percentage of the capital invested. The universal yardstick for comparing investment performance.
Beginner