What Is ROE (Return on Equity) and What Counts as High?
How efficiently the company turns shareholders' money into profit. Sustained above 15% is generally solid; unusually high (>50%) usually reflects debt or buybacks, not extra strength.
ROE (return on equity) measures how much net profit a company earns for every unit of shareholder equity. It answers "how efficiently does this business make money with its own capital" and is one of the most widely used quality metrics.
How it is calculated
In words: net profit divided by shareholders' equity (book value), times 100. Net profit is taken from the latest fiscal year or the trailing twelve months; equity is usually the period-end figure or the average of opening and closing balances. An ROE of 20% means the company earned 20 for every 100 of equity in a year.
It splits into three parts (the DuPont breakdown): net margin × asset turnover × equity multiplier. The same 20% can come from fat margins, fast turnover, or heavy borrowing — and the last is the lowest-quality source, because the return is amplified by debt.
Rules of thumb
| ROE | What it usually means |
|---|---|
| Below 5% | Low return; possibly near loss or stuck in an asset-heavy slump |
| 5% to 15% | Around average |
| 15% to 30% | Usually considered strong if sustained |
| Above 50% | Often debt or buybacks shrinking equity; the number is distorted |
These bands are conventions and vary a lot by industry: software and consumer brands run naturally high, utilities and banks often sit near 10%. Consistency across several years of the same company matters more than the absolute level.
What it does not tell you
- Where the return comes from. High leverage and high operating efficiency produce the same ROE; pair it with the liabilities-to-assets ratio.
- The effect of buybacks. Years of large repurchases can push equity toward zero or negative, making ROE extreme or meaningless.
- Whether the stock is expensive. High-ROE companies are often already richly priced — see P/B.
In Stock Compass
On the card's fundamentals row, "ROE" shows as a whole-number percentage and turns green at 15% or above. The figure comes from the fundamentals cache and is occasionally missing for HK and A-share listings.
In the verdict's business-quality dimension, ROE at or above 15% is a positive note ("a high return on shareholder capital"), below 5% is a caution, and anything between is neutral. When ROE exceeds 60%, or the valuation model flags an ROE anomaly, Stock Compass does not count it as a strength: it states that the figure is "usually buybacks shrinking book equity", lowers overall confidence a notch, and notes in the valuation dimension that P/B and ROE carry limited meaning for that company.
In strategy rules the indicator id is roe_pct; an example condition is roe_pct > 15. It is commonly combined with net margin and a leverage ratio in the same group so that "high return" and "low debt" are required together, filtering out returns built on borrowing. For turning that logic into a testable rule, see turn logic into buy rules.
FAQ
Is a higher ROE always better?
Within a normal range, yes. Above roughly 50% it usually means equity has been shrunk by buybacks or losses, so the denominator is distorted. Stock Compass stops counting ROE as a strength above 60% or when the model flags an anomaly.
What is the difference between ROE and ROA?
ROA divides by total assets, ROE by equity only. The wider the gap between them, the more debt the company uses. Reading both tells you roughly how much of a high ROE is leverage.
A bank shows ROE near 10%. Is that weak?
Not necessarily. Banks and utilities run structurally lower ROE, so the comparison only means something against peers. Comparing ROE across industries systematically favours asset-light businesses.
Definition only — not investment advice.