Glossary
Return on Equity (ROE)
Net income as a percentage of shareholder equity.
ROE = Net Income / Average Shareholder Equity × 100%. It measures how efficiently management converts equity capital into profit.
Sustained ROE above 15–20% is the hallmark of a high-quality business. Warren Buffett famously prioritises ROE over earnings growth in screening.
Decompose via DuPont: ROE = Net Margin × Asset Turnover × Equity Multiplier. Two firms can both have 18% ROE — one with high margins, the other with leverage. The leveraged one carries more risk.