Return on Equity (ROE)
Overview
ROE measures how efficiently a company generates profit from shareholders' equity, making it one of the most important quality metrics in stock analysis. It is a key indicator of management quality and business moat — companies like Apple (AAPL) consistently post high ROE thanks to strong brand and pricing power. This guide covers the DuPont decomposition, which breaks ROE into margin, turnover, and leverage components, giving you deeper insight into what truly drives returns. Apply ROE-based screening with our stock screener to identify compounders favoured by value investors.
Key Takeaways
- ROE = Net Income / Shareholders' Equity.
- Consistently high ROE (15%+) often indicates a durable competitive advantage.
- DuPont analysis breaks ROE into: Profit Margin × Asset Turnover × Equity Multiplier.
- High ROE driven by high leverage (equity multiplier) is riskier than high ROE from margins.
Practical Tips
- Compare ROE against cost of equity — if ROE < cost of equity, the company destroys value.
- Track ROE over 5-10 years to identify businesses with sustainable advantages.
- Companies with high ROE and low payout ratios can reinvest at attractive rates.
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