Investology > ROE

ROE

ROE (Return on Equity) measures how efficiently a company generates profits from shareholders' equity, showing how much profit a company produces with each dollar of shareholder investment. Consistently high ROE (15%+) often signals strong competitive moats, pricing power, or operational excellence that competitors can't easily replicate.

ROE (Return on Equity) measures how efficiently a company generates profits from shareholders’ equity, showing how much profit a company produces with each dollar of shareholder investment.

Think of ROE as the ultimate report card for management. It’s like asking “If I gave you $100 of my money, how much profit would you make with it?” It separates the financial wizards from the capital incinerators.

ROE = Net Income / Average Shareholders' Equity × 100

Why ROE Matters in Stock Analysis:

  • Management Efficiency Test: High ROE suggests management is skilled at turning shareholder money into profits, while low ROE might indicate inefficient capital allocation.
  • Competitive Advantage Detector: Consistently high ROE (15%+) often signals strong competitive moats, pricing power, or operational excellence that competitors can’t easily replicate.
  • Growth Sustainability Gauge: Companies with higher ROE can fund growth internally without diluting shareholders or taking on excessive debt.
  • Quality Filter: ROE helps distinguish between companies that grow through smart reinvestment versus those that grow by simply throwing more money at problems.

Example: Apple (NASDAQ: AAPL) generates $100 billion in net income with $60 billion in shareholders’ equity, producing an ROE of 167%. This astronomical figure reflects Apple’s ability to generate massive profits with relatively little shareholder capital, a testament to its asset-light, high-margin business model.

Bottom Line: ROE reveals which companies are genuinely profitable growth engines versus capital-hungry value destroyers, making it essential for identifying management teams that actually know how to make money work.