ROE
Return on shareholders' equity.
ROE (return on equity) measures how much net income a company generates per dollar of shareholders' equity. It's one of the most important ratios for judging business quality: it tells you how efficiently management converts shareholder capital into profit.
A 20% ROE means that for every $100 of equity, the company generates $20 of profit per year. Sustained over time, it's a sign of competitive advantage: the business compounds capital faster than the cost of that capital. Warren Buffett built much of his philosophy on this number.
Worked example
Visa (V) generated about $20 billion in net income in fiscal year 2025 against average equity of $40 billion. ROE = (20 ÷ 40) × 100 = 50%.
Fifty percent is exceptionally high. For context: the median S&P 500 ROE is around 15–17%; traditional banks land at 10–15%; manufacturers at 8–12%. A sustained 50% ROE reflects Visa's business model: a payment network with vanishingly small marginal costs, regulation that limits new entrants, and cash generation that dwarfs invested capital.
When it's used
ROE is particularly useful for spotting 'quality compounders': companies that can reinvest earnings at high rates of return and grow compoundedly over time. Moat investing leans heavily on this metric. It's also a standard screener filter: 'stocks with ROE above 15% for 5 consecutive years' is a common query. When comparing companies within the same sector (two banks, two insurers), ROE is one of three numbers to watch alongside operating margins and debt-to-equity.
Limits
ROE can be inflated by leverage. If a company takes on heavy debt (shrinking equity), the denominator shrinks and ROE mechanically rises — but the company is riskier, not more profitable. That's why ROE is always paired with debt-to-equity, or replaced by ROIC (return on invested capital), which includes debt in the denominator. ROE also depends on accounting net income, which can be distorted by one-off items.
Frequently asked
What's a good ROE?
Roughly, sustained ROE above 15% for multiple consecutive years is considered good. Above 25%, excellent. Always benchmark against the sector and check leverage: a 30% ROE built on 3:1 debt-to-equity is weaker than a 20% ROE with a clean balance sheet.
Difference between ROE and ROI?
ROE measures return on equity (shareholder capital). ROI (return on investment) is a more generic term that can apply to projects, assets, or specific operations. For listed-company analysis, ROE is the standard.
What does negative ROE mean?
It means the company reported a loss for the period. ROE becomes uninformative — better to track revenue trends and free cash flow instead.
Related terms
Educational definition. Not financial advice.