Return on Equity (ROE)
Return on equity measures how efficiently a company generates profit from shareholders' money.
ROE is calculated as net income divided by shareholders' equity. A high and stable ROE signals that management is deploying capital productively. Sustained ROE above 15% over many years is one of the hallmarks Warren Buffett looks for.
ROE can be artificially inflated by heavy debt — borrowed capital boosts the denominator (equity is assets minus liabilities, so more debt means less equity for the same asset base). Always read ROE alongside the debt-to-equity ratio.
ROE varies dramatically by sector: capital-light software businesses routinely exceed 30%; utilities and capital-intensive manufacturers often sit below 10%.
Example
A company with £1bn net profit and £5bn shareholders' equity has an ROE of 20%.
Further Reading
Benjamin Graham's classic on value investing — the book Warren Buffett calls the best ever written on the subject.
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Recommended Reading & Tools
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Philip Fisher's growth-investing classic on evaluating management and moats.
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