Glossary
Return on equity (ROE)
Net income divided by shareholders’ equity: the profit a company earns on the money its owners have invested and left in the business.
On this page
Return on equity (ROE) measures how much profit a company generates on the equity its shareholders own. An ROE of 20% means the business earned 20 cents in a year for every dollar of book equity. Investors watch it because a company that can reinvest at a high ROE for many years tends to compound its value quickly; it is one of the most cited measures of business quality.
How it works
The DuPont breakdown splits ROE into three drivers, which shows where a high or low number comes from:
What to watch for
- Leverage. Debt shrinks equity relative to assets, which raises ROE even if the business is no more profitable. Check Debt-to-Equity Ratio alongside it.
- Buybacks. Repurchasing shares reduces equity, so ROE rises. Some large companies have bought back so much stock that equity is tiny or negative, making ROE extreme or meaningless.
- One-off items. A big gain inflates a single year; a write-down that cuts equity can inflate later years.
- Industry norms. Banks are often judged against an ROE of around 10% to 15%, while asset-light software firms can show much higher figures.
ROE and the Price-to-book ratio (P/B) ratio are linked: companies with persistently high ROE usually trade at large premiums to book value.