What Is ROE (Return on Equity)? Formula and How to Calculate It
ROE shows how much profit a company makes on its shareholders' money. Here's the formula, what normal values look like and the debt trap.
What it is
ROE (Return on Equity) is the return on shareholders' equity:
ROE = net income ÷ shareholders' equity × 100%
A company's equity is 1 billion and its annual profit is 150 million. ROE = 15%: every ruble of shareholders' money earned 15 kopecks.
What's a good ROE
| ROE | What it may mean |
|---|---|
| Negative | The company is losing money |
| Below deposit rates | The business is performing poorly |
| Consistently high | An efficient business — worth looking into further |
Compare ROE within the same industry: banks and tech companies have different norms.
The debt trap
If a company borrows heavily, its equity is small and ROE looks great. So look at debt alongside ROE. Other metrics — EPS, P/E and the financial ratios and screeners lesson.
Aspiro Invest — a medium-term portfolio: what to hold, when to review it and where the protective levels are.
- ROE is profit ÷ shareholders' equity.
- Compare within an industry and over several years.
- High debt artificially inflates ROE.
Frequently asked questions
How is ROE different from ROA?
ROA measures profit relative to all of a company's assets, including those funded by borrowed money. ROE measures it only against shareholders' equity.
Why can ROE be huge?
If shareholders' equity is very small — because of debt or share buybacks. Then the number tells you little.
Where can I find ROE?
In stock screeners and on financial websites, or you can calculate it yourself from the financial statements.
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