Return on Equity (ROE)
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Return on Equity (ROE) measures how efficiently a company generates profit from shareholders' equity. It shows how much net income is produced for every pound or dollar of equity invested. ROE = Net income / Shareholders' equity.
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Tip: High ROE achieved through high debt (leverage) is misleading. Always check the debt/equity ratio alongside ROE to ensure returns stem from business quality, not borrowed money.
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Fun Fact
Warren Buffett uses ROE as a primary filter — he looks for companies consistently achieving 15%+ ROE without excessive debt, which he views as a sign of durable competitive advantage.
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