ROE, or Return on Equity, measures how much profit a company earns for every rupee that shareholders have invested. It is one of the most watched ratios in stock analysis. In this guide you will learn the ROE formula, what a good ROE is, how the DuPont method explains it, and where ROE can mislead you, with a clear worked example.
Educational content only. This is not investment advice. All company figures below are hypothetical.
Key Takeaways
- ROE = Net profit ÷ Shareholders’ equity × 100.
- Consistent ROE above 15% is usually seen as good.
- Heavy debt can make ROE look high without making the business better.
- Check ROE with debt-to-equity and ROCE.
What Is ROE?
If you put ₹100 into a business and it earns ₹15 profit for you in a year, your return is 15%. ROE does the same for a whole company: it divides net profit by the money that belongs to shareholders.
ROE Formula
ROE = Net Profit ÷ Shareholders’ Equity × 100
Net profit comes from the profit and loss statement. Shareholders’ equity (net worth) comes from the balance sheet. Many analysts use the average of opening and closing equity for a fairer result.
Worked Example
Hypothetical company with net profit ₹120 crore and shareholders’ equity ₹800 crore.
- ROE = 120 ÷ 800 × 100 = 15%
DuPont Analysis: What Drives ROE?
ROE = Net profit margin × Asset turnover × Equity multiplier
- Net profit margin: Net profit ÷ Revenue
- Asset turnover: Revenue ÷ Total assets
- Equity multiplier: Total assets ÷ Equity (a measure of leverage)
| Item | Company A | Company B |
|---|---|---|
| Net profit margin | 10% | 5% |
| Asset turnover | 1.2 | 1.0 |
| Equity multiplier | 1.25 | 3.0 |
| ROE | 0.10 × 1.2 × 1.25 = 15% | 0.05 × 1.0 × 3.0 = 15% |
Both companies show a 15% ROE. But Company A earns it from good margins and low leverage, while Company B reaches it by borrowing heavily. Company A is the safer, higher-quality business.
What Is a Good ROE?
| ROE | General reading |
|---|---|
| Below 10% | Weak |
| 10% to 15% | Average |
| 15% to 20% | Good |
| Above 20% | Excellent, if consistent and not debt-driven |
When ROE Can Mislead
- High debt: a small equity base makes ROE look big.
- Buybacks: they shrink equity and lift ROE without better business.
- One-time gains: a lucky profit spike inflates a single year.
- Very small or negative equity: ROE becomes meaningless.
Pros and Cons of ROE
| Pros | Cons |
|---|---|
| Easy to calculate and compare | Inflated by debt |
| Shows how well owners’ money is used | Can be distorted by buybacks and one-offs |
| Useful for tracking quality over time | Weak guide for banks without other measures |
FAQs
What is a good ROE for Indian stocks?
Consistent ROE above 15% is generally considered good. Compare with companies in the same industry.
Is a very high ROE always good?
No. If it comes from heavy debt or tiny equity, it can signal risk instead of quality.
What is the difference between ROE and ROCE?
ROE uses net profit and equity only. ROCE uses EBIT and both equity and debt, so debt does not inflate it.
Can ROE be negative?
Yes, when the company makes a loss.
How many years of ROE should I check?
At least 5, ideally 10, to see whether returns are steady.
Conclusion
ROE tells you how well a company rewards its owners, but only when you check why it is high. Use DuPont to break it down and confirm with debt and ROCE. Read more in our guide to fundamental analysis of stocks and our PE ratio explainer. For daily institutional flow figures, see the FII and DII data home page.
Disclaimer: Educational only, not investment advice. Figures are hypothetical. Verify data from official filings. Sources: NSE, BSE, Zerodha Varsity.
