Educational purposes only. This content does not constitute investment advice. Read our disclaimer
StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.Simple Definition
A profitability measure showing how much profit a company generates for each dollar of shareholders' equity. Higher ROE = more efficient profit generation.
Why It Matters
ROE tells you how efficiently a company uses shareholder money to generate profits. An ROE of 20% means the company earns $0.20 for every $1 of equity. Warren Buffett famously looks for companies with consistently high ROE (above 15%) as a sign of durable competitive advantage. It helps distinguish truly great businesses from average ones.
Key Points
- Calculate it: Net Income ÷ Shareholders' Equity × 100
- Above 15% is generally strong; above 20% is excellent. Below 10% may signal inefficiency
- Watch out: High debt can artificially inflate ROE (less equity = higher ratio). Compare with debt levels
Related Terms
Common Questions
A profitability measure showing how much profit a company generates for each dollar of shareholders' equity. Higher ROE = more efficient profit generation. ROE tells you how efficiently a company uses shareholder money to generate profits. An ROE of 20% means the company earns $0.
ROE tells you how efficiently a company uses shareholder money to generate profits. An ROE of 20% means the company earns $0.20 for every $1 of equity. Warren Buffett famously looks for companies with consistently high ROE (above 15%) as a sign of durable competitive advantage. It helps distinguish truly great businesses from average ones.
Calculate it: Net Income ÷ Shareholders' Equity × 100
Above 15% is generally strong; above 20% is excellent. Below 10% may signal inefficiency
Watch out: High debt can artificially inflate ROE (less equity = higher ratio). Compare with debt levels