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What is ROE (return on equity)?

ROE measures how much profit a company generates relative to shareholders' capital: the profitability rate of equity.

It's calculated by dividing net income by shareholders' equity. A 20% ROE means every $100 of equity produces $20 of profit a year. Warren Buffett considers it a key indicator of a quality business, especially when stable over time.

Watch out for debt: a heavily leveraged company can inflate ROE by shrinking its equity base. That's why it should be read alongside financial leverage.

Concrete example

Companies with durable competitive advantages — Apple, Microsoft, Moody's — sustain ROE above 25% for decades; the market average is around 10–15%.

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Frequently asked questions

What's a good ROE?

Above 15%, stable over time, is considered excellent — as long as it isn't juiced by debt.

What's the difference between ROE and ROI?

ROE measures return on shareholders' equity; ROI the return on a specific investment.