What Is Return on Equity?
Return on equity, or ROE, shows how much profit a company makes with the money its owners have put in. It measures how well management uses shareholders' money.
How to calculate ROE
Net income÷Shareholders' equity×100=ROE %
A company earns $20 million and has $100 million of equity, also called book value. Its ROE is 20%.
What is a good ROE?
Many investors like an ROE of 15% or more, held steady over many years. Compare within an industry. Banks often run around 10% to 15%; strong brand and software companies can run much higher.
The debt trick
Borrowing lowers equity, which pushes ROE up even if the business is no better. A very high ROE can come from heavy debt. Check debt-to-equity and ROIC too.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Return on assetsProfit made with everything the company owns.
ROICHow well a company turns invested money into profit.
Book valueWhat the company is worth on paper.
Debt-to-equityHow much debt compared with owners' money.
Net incomeThe final profit after every cost.
Price-to-bookPrice compared with what the company is worth on paper.