An ROE above 15% is generally considered good, and above 20% is excellent — indicating a durable competitive advantage. An ROE below 10% is considered weak. The best companies in the world — Apple, Visa, Mastercard — consistently post ROE well above 30%.

Why did Warren Buffett use ROE to find great businesses?

Buffett used ROE because a consistently high ROE means the company generates strong returns from its existing asset base — a hallmark of durable competitive advantages (economic moats). A business that earns 20% ROE year after year is compounding shareholders' wealth efficiently without needing massive reinvestment.

Can high ROE be misleading?

Yes — high ROE can be misleading when driven by excessive debt rather than genuine business profitability. Borrowing heavily shrinks the equity base and inflates ROE without generating better returns on the underlying business. Always check the debt-to-equity ratio alongside ROE.

What Is Return on Equity (ROE)? Profitability Explained

Q: What is return on equity (ROE)?

Return on equity (ROE) measures how much profit a company generates for every dollar of shareholders' equity. Formula: ROE = Net Income ÷ Shareholders' Equity × 100. It tells you how efficiently management uses investor capital.

Return on equity (ROE) measures how much profit a company generates for every dollar of shareholders' equity. It tells you how efficiently management is using the money investors have put into the business.

ROE = Net Income ÷ Shareholders' Equity × 100

Example: A company with $100M in net income and $500M in shareholders' equity has an ROE of 20% — a strong result for most industries.

Why ROE Matters

ROE is one of Warren Buffett's favorite metrics for identifying great businesses. A consistently high ROE means the company is generating strong returns from its existing asset base — a hallmark of durable competitive advantages (moats). The best companies in the world — Apple, Visa, Mastercard — consistently post ROE well above 30%.

What Is a Good ROE?

Below 10%: Weak — the company is not generating sufficient returns for shareholders.
10–15%: Average — in line with broad market returns.
15–20%: Good — above average business quality.
Above 20%: Excellent — indicates a durable competitive advantage.

ROE vs. Return on Assets (ROA)

ROA = Net Income ÷ Total Assets. While ROE measures returns on equity, ROA measures how efficiently a company uses all assets (including debt-financed ones). A high ROE can sometimes be inflated by heavy debt — compare both metrics to get the full picture.

ROE Limitations

High ROE can be misleading when driven by excessive debt rather than genuine business profitability. A company that borrows heavily shrinks its equity base and inflates ROE without generating better returns on its underlying business. Always check the debt-to-equity ratio alongside ROE.