ROE
How well the company turns shareholder money into profit. What counts as a strong ROE depends on the industry, so compare a company with its own history and with its peers. 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. An ROE that stays high for years without heavy debt behind it can be a sign of a competitive advantage.
How to read it
What counts as strong depends on the industry -- banks, software companies and utilities run at very different levels -- so compare a company with its own history and its peers. 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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