Return on Equity (ROE)

ROE measures how much profit a company generates per dollar of shareholders' equity. An ROE of 15% means the company earns $15 for every $100 of equity capital. Higher ROE signals efficient capital use, but beware: high leverage inflates ROE mechanically. The DuPont decomposition breaks ROE into three components: ROE = Net Margin × Asset Turnover × Equity Multiplier (or ROE = Profitability × Efficiency × Leverage). This reveals how a company achieves its ROE: through margins (pricing power), asset efficiency (capital-light model), or leverage (financial engineering). Typical values: 10-15% is average, 15-25% is strong, >25% is exceptional (high-moat businesses). Banks and leveraged firms often show >15% ROE structurally.