Profitability
Return on Equity (ROE)
ROE measures how much profit the company generates for each dollar of shareholder equity.
Return on equity is the classic quality ratio. A business that earns 20% on equity can compound book value quickly if it retains the profit. A business that earns 5% will not, no matter how cheap the P/E looks, unless the price is a deep discount to a real asset value.
Debt boosts ROE. Borrowed money shrinks the equity denominator, so a leveraged firm can post a glamorous ROE on ordinary operating returns. Read ROE next to ROIC and debt-to-equity. If ROE is high and ROIC is ordinary, the leverage is the trick. Banks are the exception in presentation: for a bank, equity returns are the right lens because the balance sheet is the business.
Formula
ROE = net income ÷ average shareholders' equity
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Apply the formula on this page to that live price. Where the quote is missing an input, the stock page's financials are the next place to read it.
Related
Return on Invested Capital (ROIC) · Return on Assets (ROA) · Debt to Equity
See it on a list: best stocks · screener
Questions
What ROE is high quality?
Mid-teens or better, sustained, without a dangerous debt load, is the usual quality screen. A single year above 30% can be a gain on sale.
Why use average equity?
Profit is earned across the year. Ending equity alone misstates the base if the company issued or repurchased stock.