ROE
Return on Equity · ROE
How many dollars of profit the company generates from each dollar of shareholders' equity.
What it is
ROE = Net Income / Shareholders' Equity
ROE is the shareholder's perspective: how efficiently management generates returns on the capital you have invested.
High ROE is not always positive — it can be caused by:
- →A genuinely excellent business (desirable)
- →High leverage (debt inflates ROE — dangerous)
- →Share buybacks (reduce the denominator — optical effect)
Always monitor ROE together with the degree of leverage.
Why track it
ROE above 15–20% is generally a good result. Consistent ROE 25%+ signals a strong competitive advantage.
Analyze ROE through the DuPont decomposition: ROE = Net Margin × Asset Turnover × Financial Leverage. This reveals whether the result is driven by operational efficiency or aggressive financing.
Real-world example
Microsoft: ROE ~40.8% — well above the historical median (38%) and peer average (20–35%). A combination of high net margin and efficient capital utilization.