Profitability · updated October 21, 2026

What is ROE (return on equity) and how is it calculated

ROE shows how many dollars of profit the company makes in a year for every $100 shareholders have left in the business. An ROE of 20% means $20 of profit a year for every $100 of equity.

ROE formula

ROE=Net profit over the last 12 monthsAverage shareholders' equity× 100

Net profit: What is left after all costs, interest and tax.
Shareholders' equity: Assets minus liabilities: the shareholders' money in the company. We use the average of the start and end of the period.

Worked example

A company has equity of $10 billion and a net profit of $1.8 billion a year.

$1.8 bnnet profit

$10 bnequity

18%ROE = 1.8 ÷ 10 × 100

For every $100 of shareholders' money, the company made $18 of profit in a year.

How to read ROE

Below 8%weak: the money would earn almost as much in a savings account

8% - 15%good for many sectors

Above 15%very good, as long as it does not come from heavy debt

For banks, an ROE of 12-15% is already good. Software companies and strong consumer brands often go above 25%.

When ROE can fool you

Heavy debt: a company with a lot of debt has little equity, so ROE comes out high without the business being any better. Negative equity: after big buybacks, ROE stops making sense; look at ROIC instead.

Related terms

ROA ROIC P/B Net margin Debt / equity

Questions about ROE

What is a good ROE?

Above 15% is considered good for most companies. It should be steady for several years and not come only from debt.

What is the difference between ROE and ROIC?

ROE uses only shareholders' money. ROIC uses all invested capital, debt included, so borrowing cannot inflate it.

These explanations are for information only. They are not a recommendation to buy or sell.

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