Return on Equity (ROE)
How much profit does a company generate from shareholders' equity?
Definition
ROE measures the profitability of a company relative to the equity held by common shareholders. It is one of the most widely used profitability metrics.
Formula
Where:
- Net Income: Net Income to Common Stockholders (after preferred dividends)
- Equity: Total Stockholders' Equity
- Preferred Stock: Preferred Stock value (if any)
Interpretation
| Range | Assessment |
|---|---|
| > 15% | Strong — consistently generates value for shareholders |
| 10% – 15% | Adequate — acceptable for most industries |
| < 10% | Weak — may indicate inefficient capital use |
Caution: High ROE driven by excessive leverage (high D/E) is not inherently positive. Always check ROE alongside D/E and ROIC.
Industry Routing
Available for all industries (Industrial, Banking, Insurance).
In Finsco
Computed by the audit returns command. ROE Quality advisory uses the median (not mean) to resist outlier years — e.g., a one-time asset write-down that spikes ROE to -80% won't distort the quality judgment. ROE Stability uses CoV (coefficient of variation) with a < 10% threshold for "highly stable".
audit returns