Glossary · Intermediate
ROE (Return on Equity)
How much profit a company generates from each unit of shareholder capital — the headline test of whether a business compounds.
ROE (Return on Equity)
Return on equity answers one question: for every unit of capital shareholders have in this business, how much profit does it produce in a year?
The formula
ROE = Net income / Shareholders' equity
Equity is what is left when you subtract everything the company owes from everything it owns. So ROE measures profit against the owners' stake, not against the size of the company.
How IQInvest reads it
These are the exact bands the analysis page uses, so the grade and this page never disagree.
- Below 0% — negative. Shareholder capital is shrinking rather than compounding.
- 0-10% — weak. The business is not doing much with the money invested in it.
- 10-20% — strong. Generally considered a good business.
- Above 20% — very strong, and worth a second look.
The trap worth knowing
A very high ROE is not automatically good news, because equity sits in the denominator. A company that borrows heavily shrinks its own equity, and a smaller denominator inflates ROE without the business improving at all.
Apple is the textbook case: its ROE runs well over 100%, not because it earns more than it is worth, but because years of buybacks have driven equity down. Always read ROE next to debt-to-equity. If ROE is spectacular and gearing is high, the leverage is doing some of the work.
Related
- Return on assets uses total assets instead of equity, so it cannot be flattered by borrowing.
- Debt-to-equity tells you whether leverage is inflating this number.