Return on Equity (ROE)
How much profit the company earns on the money owners have put in. The investor’s favourite.
ROE = Net profit ÷ Shareholders’ equity
The annual profit generated for every ₹1 of owners’ capital in the business.
ROEProfit generated per rupee of shareholders’ equity. answers the question you most care about as an owner: how well does the company turn MY money into profit? A 20% ROEProfit generated per rupee of shareholders’ equity. means the business earns ₹20 a year on every ₹100 of equityA unit of ownership in a company. — and if it reinvests that at the same rate, your wealth compounds at roughly that pace.
A business that sustains a high ROEProfit generated per rupee of shareholders’ equity. (say 18%+) for many years is a compoundingEarning returns on your returns — growth that accelerates over time. machine — it reinvests profits at high returns, snowballing owner wealth. Consistently high ROEProfit generated per rupee of shareholders’ equity. is one of the strongest quantitative signs of a quality business with a moat.
Common mistakeCheering high ROEProfit generated per rupee of shareholders’ equity. without checking debt. ROEProfit generated per rupee of shareholders’ equity. can be juiced by piling on borrowing (which shrinks equityA unit of ownership in a company.) — a high ROE built on heavy leverageControlling a large position with a small amount of money. is fragile, not great. Always pair ROE with the debt level (and see ROCEProfitability on all capital — equity plus debt. next).
Key takeawayROEProfit generated per rupee of shareholders’ equity. = profit per rupee of owners’ capital; sustained high ROEProfit generated per rupee of shareholders’ equity. signals a compoundingEarning returns on your returns — growth that accelerates over time., quality business — but verify it isn’t just leverageControlling a large position with a small amount of money..
FAQs
What is a good ROE?
As a rough guide, consistent ROE above ~15–18% is strong, especially if achieved without heavy debt. But always compare within an industry and check that high ROE isn’t driven by excessive leverage or one-off gains.