What it is
Return on equity (ROE) is a financial ratio calculated by dividing a company's net income by its shareholder equity. It indicates how efficiently a company is using its shareholders' investments to generate profits. A higher ROE suggests that management is effectively deploying capital to create earnings for its owners, reflecting strong operational performance and efficient use of equity financing.
ROE is a key metric in financial reports and investor presentations, often discussed during earnings calls. Companies with consistently high ROE are generally seen as more attractive investments. However, ROE can be inflated by high debt levels, as debt reduces equity. Investors compare a company's ROE to its industry peers and historical performance to assess its financial health and growth prospects.
Why it matters
ROE helps you gauge how well a company uses shareholder money to make profits, indicating management effectiveness. It's crucial for identifying financially strong companies.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice