Return on Equity (ROE) is one of the most important financial ratios for investors. It tells you how efficiently a company is using shareholders' money to generate profits.

ROE Formula

ROE = (Net Profit / Shareholders' Equity) × 100

For example, if a company has a net profit of ₹10 crore and shareholders' equity of ₹50 crore, its ROE is 20%.

What Is a Good ROE?

Generally, an ROE of 15-20% or above is considered good. However, what counts as 'good' varies by industry. Banks and IT companies typically have different ROE benchmarks.

Why ROE Matters

  • It shows how well management is using investor capital
  • A consistently high ROE indicates a competitive advantage
  • It helps compare companies within the same industry

Limitations of ROE

ROE can be artificially inflated if a company takes on a lot of debt (since debt reduces equity). Always look at ROE alongside the debt-to-equity ratio.

ROE vs ROCE

While ROE measures return on equity, ROCE (Return on Capital Employed) measures return on all capital (equity + debt). ROCE gives a more complete picture for companies with significant debt.

Disclaimer: This article is for educational purposes only.