Return on Equity (ROE)
Net income divided by shareholders’ equity — profitability per dollar of equity capital.
Definition
ROE measures how efficiently management converts shareholder capital into profits. A consistent ROE above 15% is the hallmark of a high-quality business; above 20% suggests a durable competitive advantage. ROE can be inflated by leverage (more debt, less equity, higher ROE) which is why it should always be cross-checked with ROIC and the debt-to-equity ratio. The DuPont decomposition splits ROE into margin × turnover × leverage.
Formula
ROE = Net Income / Shareholders Equity
DuPont decomposition:
ROE = Net Margin * Asset Turnover * Equity Multiplier
= (NI/Sales) * (Sales/Assets) * (Assets/Equity)Worked example
A company has $2B net income and $10B average shareholders equity: ROE = 20%. Its DuPont breakdown: 12% net margin × 1.0x asset turnover × 1.67 equity multiplier = 20%. Most of the ROE comes from margins, not leverage — a higher-quality 20% than a competitor delivering 20% via 3x leverage.
How ARIA Analyst uses it
ARIA stores 10-year ROE histories and rewards stable double-digit ROE in the Quality Agent score.
Related terms
Return on Invested Capital (ROIC)
NOPAT divided by total invested capital — true return on operating capital, independent of capital structure.
Debt-to-Equity (D/E)
Total debt divided by shareholders’ equity — the simplest leverage ratio.
Price-to-Book (P/B)
Market value of equity divided by accounting book value — classic asset-based metric.
Residual Income Model
Equity value as book value plus the present value of excess returns over cost of equity.
See Return on Equity (ROE) in action on any asset
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