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Updated 1mo ago.
Updated 1mo ago.
ROE = net earnings ÷ shareholders' equity. Measures how much profit the company generates per dollar invested by shareholders. A consistent ROE above 15% signals a quality company. Caveat: a very high ROE can come from leverage (debt) rather than operational excellence — always check debt-to-equity alongside.
A company earns $100M net profit on $500M of shareholders' equity (owners' money). Its return on equity (ROE) is 20% — each dollar shareholders invested generates 20¢ of profit.
ROE is one of Warren Buffett's favorite ratios: it shows how profitably shareholders' money is used. A high, durable ROE signals a competitive edge. But beware: an ROE inflated by heavy debt is more fragile.