Return on Equity: Shareholder Efficiency — Key Financial Ratios

§ 01

AAPL — Return on Equity, Debt/Equity. Open AAPL on the Ledge to see current values.

§ 02

ROE = Net Income / Shareholders' Equity

§ 03

An ROE of 20% means the company earns $0.20 for every $1 of equity. Buffett targets companies with ROE consistently above 15%.

§ 04

DuPont decomposition splits ROE into three drivers: ROE = Net Margin × Asset Turnover × Equity Multiplier (leverage). The same 25% ROE can come from a wide-moat compounder (high margin) or a thin-margin business levered to the hilt — these are not the same investment.

§ 05

Watch out: high debt can artificially inflate ROE by shrinking the equity denominator. Always check Debt/Equity alongside ROE.

§ 06

Find the **ROE** in any ticker's profitability metrics. Then check the **Debt/Equity** ratio. If D/E is above 2.0, the high ROE might be debt-driven.

§ 07

Two companies both have ROE of 25%. Company A has D/E of 0.5, Company B has D/E of 4.0. Which ROE is more impressive?

§ 08

ROE tells you how well management uses shareholder capital. But context matters: a 25% ROE funded by prudent operations is worth far more than one propped up by aggressive borrowing.

Five questions · AI feedback

Sit with the ideas.

Company X has ROE of 25% and Debt/Equity of 0.3. Company Y has ROE of 30% and Debt/Equity of 4.0. Which is the better business?

Why:

Try this in paper trading

Buy the cheaper of two competitors

Pick a sector you understand — coffee, banks, semis. Find two competitors. Compare their P/E ratios. Paper-buy the cheaper one and write a thesis explaining why the market might be wrong (or right) about the discount.

Open paper portfolio →

Practice mode — simulated trades, not investment advice.

Sit with the ideas.

Buy the cheaper of two competitors

Other lessons in this course.