Profitability

ROE (Return on Equity)

Return on Equity

A profitability metric showing what percent of shareholders' capital (equity) the company earns in a year.

In plain terms

Say you put in $50,000 to open a shop and earned $10,000 in a year — you made 20% on your own money. That 20% is ROE.

For stocks, it asks "what percent of the money shareholders have put into the company (equity) did it earn in a year." The higher the ROE, the more efficiently it used shareholders' money. It is also said to be the metric Warren Buffett looks at most.

What it tells you

ROE captures in a single number "how well this company compounds shareholder capital." A sustained ROE of 15% means the company can plow earnings back into the business and grow shareholder value at roughly that rate each year.

So for long-term investors, a consistently high ROE is one of the key marks of a good business. But where that height comes from matters even more — which is the pitfalls section below.

Formula

ROE = net income (TTM) ÷ shareholders' equity × 100

What high or low means

A higher ROE is read as better capital efficiency, but heavy use of debt shrinks equity for the same earnings and can inflate ROE.

So when ROE is high, it is important to tell whether the height comes from business strength or from borrowing (debt).

Caution

Always check where a high ROE came from. ROE is the product of three things — ① how much you keep from sales ② how busily you turn over assets ③ how much debt you use. Raising just ③ debt alone lifts ROE. So a 20% ROE built on heavy debt and a 20% ROE built with no debt are completely different in quality. When ROE is high, look at debt-to-equity and ROIC together to reveal its source (Stocklore's context reading flags exactly this cross automatically).

Large buybacks shrink equity (the denominator), so ROE rises mechanically. It may be a smaller-denominator effect rather than a better business, so look at why equity is at that level too.

A company with heavy losses whose equity is near zero or negative shows an abnormally large ROE, or none at all. ROE numbers in those cases are meaningless.

Metrics to read alongside

Debt-to-Equity (D/E)

For the same earnings, heavy debt shrinks the shareholders' share (equity), making ROE look bigger. So if both ROE and debt-to-equity are high, the high ROE may come from heavy borrowing rather than a strong business. Together they reveal where ROE came from.

ROIC (Return on Invested Capital)

ROIC strips out the effect of debt and shows how much the core business earns on its capital. If ROE is high but ROIC is only ordinary, much of that ROE may come from debt rather than skill.

ROA (Return on Assets)

The gap between ROE (on shareholders' money) and ROA (on total assets, including borrowed money) shows how much debt the company uses. The wider the gap, the heavier the reliance on debt.

See it in real stocks

Search US stocks on Stocklore to see ROE and other financial metrics alongside the sector average.

AAPL Apple Inc.MSFT Microsoft Corporation NVDA NVIDIA Corporation AMZN Amazon.com, Inc.Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.