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Metric · Profitability

Return on Equity (ROE) Explained

Return on equity (ROE) measures how much profit a company generates relative to its equity. It's considered a central metric for the profitability of a business model.

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Updated 20266 min read
Formula
ROE = Net income ÷ Equity × 100
> 15%Strong return on equity
10–15%Solid return on equity
< 10%Weak return on equity
Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Numerator
Net income
The after-tax profit from the income statement.
Denominator
Equity
The company's book equity.

Calculator

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Result ROE
Strong return on equity
15.0 %
1
An ROE above 15% is considered strong in many industries. The company generates above-average profit from every euro of equity employed.
2
An ROE below 10% points to weaker capital efficiency, though this can be typical for the industry (e.g. capital-intensive sectors).
3
A very high ROE can also result from high leverage (debt). Always view ROE alongside the debt ratio.

Used in these strategies

Magic Formula: Value + QualityGood companies at cheap prices: two factors, one score.Levermann Strategy (13 Criteria)The structured all-round check: 13 criteria, each +1, 0 or −1.

Frequently asked questions

As a rough guide, an ROE above 15% is considered strong, below 10% weak. But the industry-typical value varies significantly.
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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.

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