ROE
How well the company turns shareholder money into profit. Above 15% is good, above 20% is excellent. To understand why an ROE is high, decompose it: ROE = Net Margin \u00d7 Asset Turnover \u00d7 Leverage. A 25% ROE driven by 4\u00d7 leverage is fragile; a 25% ROE driven by 25% net margins on low leverage is durable.
Formula
Net Income / Equity = {netIncome} / {equity}
Why it matters
Measures how efficiently management generates profit from the capital shareholders have invested. Consistently high ROE (>15%) often indicates a competitive moat.
How to read it
Above 15% is good, above 20% is excellent. But beware high ROE driven by extreme leverage (check Debt/Equity too). The DuPont decomposition breaks ROE into: Net Profit Margin × Asset Turnover × Equity Multiplier (Total Assets ÷ Equity) — this reveals whether ROE comes from operational excellence or financial engineering. Novy-Marx (2013) found that profitability (gross profits/assets) is as powerful a predictor of returns as value. High-ROE stocks have historically outperformed, especially when combined with reasonable valuations.
Source
DuPont Analysis framework. Original DuPont Corporation annual report (1920s).
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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