💰
Return on Equity
Financial
★★★★★
Return on equity measures how efficiently a company turns shareholders equity into profit.
Explanation
ROE is net profit divided by shareholders equity. It helps evaluate profitability, capital efficiency, and competitive strength. High ROE is more meaningful when supported by sustainable margins, asset turnover, and reasonable leverage.
Formula
ROE = net profit / shareholders equity x 100%✓ When to Use
- • Compare profitability among companies in the same industry
- • Assess business quality and capital efficiency
- • Use with DuPont analysis to separate margin, turnover, and leverage effects
✗ Not For
- • Not suitable as the only basis for an investment decision.
- • Less reliable when financial data is distorted by one-off events.
- • Hard to compare directly across very different industries or business models.
⚠ Common Mistakes
- ▸ Ignoring the role of leverage in raising ROE
- ▸ Comparing ROE across very different industries
- ▸ Treating one-year ROE as a stable long-term signal
FinancialsCore Metric