Return on equity (ROE)
A year's profit divided by the owners' stake in the business: how hard shareholders' money is working.
Worked example · a round-number company
Net income$500M÷Average equity$4.0B=ROE12.5%How to read it
↑Higher is better. As long as debt isn't doing the lifting.
Example Co. 12.5%
Under 10%10% to 20%Over 20%
Above 15–20% sustained is strong.
Keep in mind
- Debt boosts it: borrowing shrinks equity, so a risky balance sheet can look efficient.
- Buybacks shrink equity too; ROE means nothing when equity is negative.