ROE

How to read it

Return on equity divides net income allotted to shareholders by average common equity. For a year, the average is taken over that year; for the trailing twelve months, stockrow uses the average common equity as of the latest quarter. The numerator rises with profit available to common shareholders. The denominator rises when the company retains earnings or issues shares, and falls when it pays dividends, buys back stock or records losses. A higher value means more profit for each dollar of shareholders’ equity.

What is typical

Return on equity depends on how a business is funded as well as how profitable it is. Banks and other businesses that run on borrowed money can post solid returns on a thin layer of equity, while companies that carry little debt, or need heavy investment, often show lower figures. Asset-light businesses with strong brands can show very high returns. Compare a company with the median for the company’s sector.

Pitfalls

Debt raises return on equity by shrinking equity, so a high value can signal leverage rather than a better business. Share buybacks and accumulated losses can push equity close to zero or below, making the ratio extremely large or meaningless. One-off gains or charges in net income move the figure without any change in the underlying business.