Return on Equity (ROE) Explained: How Well Does a Company Use Your Money?

Return on equity (ROE) measures how efficiently a company turns shareholders' equity into profit.

ROE = Net income ÷ Average shareholders' equity

A company earning $20 million on $100 million of equity has an ROE of 20%.

Why ROE Matters

Businesses that consistently earn high returns on equity can reinvest profits at attractive rates, compounding value over time. Many quality investors look for companies with ROE consistently above roughly 15%, though appropriate levels vary by industry.

The DuPont Breakdown

ROE can be split into three parts:

ROE = Net margin × Asset turnover × Financial leverage

This shows whether high ROE comes from profitability, efficiency or debt.

Watch Out For

• High debt: Leverage can inflate ROE while increasing risk — check the debt-to-equity ratio.
• Buybacks: Reducing equity through buybacks can raise ROE. See understanding stock buybacks.
• Negative or tiny equity, which makes ROE meaningless.

Many analysts also use return on invested capital (ROIC), which includes debt and gives a cleaner view.