Meaning
ROE measures how much net profit a company generates from shareholders' equity.
Formula
Net income / shareholders' equity
Practical reading
Higher ROE can signal strong profitability, but it should be checked together with debt and margins because leverage can inflate it.
Calculation detail
For a full-year comparison, using average opening and closing equity is usually more informative than using only the balance at year end. A common diagnostic is the DuPont view: ROE = net margin ร asset turnover ร financial leverage.
What to check
Compare ROE primarily with businesses that have a similar capital structure. A durable result is supported by healthy margins and sensible debt, not merely by a shrinking equity base.
Limits and caveats
Buybacks, a very small equity balance or negative equity can make ROE unusually high or mathematically unhelpful.