Return on equity measures how much profit a company generates from the equity capital that shareholders have left in the business. A higher ROE can mean efficient use of capital, but it can also be inflated by heavy debt or one-off gains. Compare ROE across peers and over several years for a fairer read.
Key takeaways
- ROE links net income to book equity.
- High ROE with rising leverage deserves extra scrutiny.
- Negative equity or tiny equity bases can make the ratio meaningless.
- Pair ROE with growth, margins and balance-sheet strength.