Reading the accounts
Return on equity
Also called ROE
Net income as a percentage of shareholders’ equity — profit earned on the owners’ capital.
How it works
ROE measures how effectively a company turns the equity entrusted to it into profit. Sustained high ROE usually indicates a genuine competitive advantage.
It can be decomposed — margin, asset turnover and leverage — which reveals whether a high figure comes from operating quality or simply from borrowing.
Where it misleads people
Debt inflates ROE mechanically, because it shrinks the equity denominator. A company can raise ROE by buying back shares with borrowed money without improving the business at all.
Formula
ROE = net income ÷ average shareholders’ equity × 100Related terms
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
- Book valueWhat the balance sheet says shareholders own: total assets minus total liabilities.
- DuPont analysisBreaking return on equity into margin, asset efficiency and leverage to see where it comes from.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
- Net incomeWhat is left after every cost, including interest and tax — the profit belonging to shareholders.
More in Reading the accounts
- Owner earnings
- Revenue
- Organic growth
- Runway
- Operating margin
- Share-based compensation
- Operating leverage
- Tangible book value
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.