What is Return on Equity (ROE)?
Net income as a percentage of shareholders' equity.
Formal Definition
Return on Equity (ROE) divides net income by average shareholders' equity, measuring how efficiently a company turns owners' capital into profit. Consistently high ROE signals a durable competitive advantage, though it can be inflated by heavy debt. The DuPont analysis decomposes ROE into margin, asset turnover, and leverage.
In Simple Terms
It shows how much profit a company squeezes out of the money shareholders have put in. A high, steady ROE usually means a well-run business with a real edge over rivals.
Example
A company earning $5 billion on $25 billion of shareholders' equity has an ROE of 20%.