What is Return on Equity (ROE)?

Return on equity is a profitability ratio that measures the net profit a company generates relative to its shareholders' equity, showing how efficiently management uses equity capital.

ROE answers the question every shareholder cares about: how much profit is the business producing for every franc of book equity? Sustained ROE above the cost of equity (typically 8–12%) signals genuine value creation.

DuPont analysis decomposes ROE into net margin, asset turnover and financial leverage — revealing whether returns come from pricing power, asset efficiency or simply higher debt. Leverage can inflate ROE but also raises risk.

Formula

ROE = Net Income ÷ Shareholders' Equity

Example

A company with CHF 800,000 net profit and CHF 5m shareholders' equity earns 16% ROE — solidly above the typical cost of equity, indicating value creation.

Related terms

Return on Investment (ROI)

Return on investment is a profitability ratio that measures the gain or loss generated by an investment relative to its cost, usually expressed as a percentage of the amount invested.

Profit Margin

Profit margin is a profitability ratio that expresses a company's profit as a percentage of its revenue, showing how many cents of profit are produced by each franc, euro or dollar of sales.

Balance Sheet

The balance sheet is a financial statement that shows a company's assets, liabilities and shareholders' equity at a single point in time, governed by the accounting equation Assets = Liabilities + Equity.

Operating Profit

Operating profit (or operating income, EBIT) is what a business earns from its core operations after deducting both the direct cost of sales and all operating expenses, but before interest and tax.

Frequently asked questions

What is a good ROE?+

Above the cost of equity, usually 10–15% sustained; world-class businesses exceed 20%.

How does ROE differ from ROI?+

ROE uses shareholders' equity as the denominator; ROI uses total investment regardless of source.

Can high ROE be misleading?+

Yes — if it comes from heavy debt, the underlying business may be less profitable than the ratio suggests.