Return on Equity (ROE): What It Is and How to Calculate It

By Peter · 23 Sept 2026

Return on equity measures how much profit a company generates for every euro of shareholder equity it has. Where book value per share tells you what a company is theoretically worth per share, ROE tells you how hard that worth is working — how efficiently the business turns its own net worth into profit.

It's one of the most-quoted numbers in investing, and one of the easiest to misread. A high ROE can mean a genuinely efficient business, or it can mean a business that's simply borrowed a lot of money. The formula alone can't tell you which.

The ROE Formula

ROE = Net Income ÷ Shareholder Equity

Both numbers come straight off the financial statements: net income from the income statement, shareholder equity from the balance sheet (the same figure used in the shareholder equity and BVPS calculations).

Some sources use average shareholder equity — the average of the figure at the start and end of the period — instead of the single end-of-period number. Averaging smooths out swings caused by a big buyback or capital raise happening right before the reporting date. For a quick check, the simple end-of-period version is fine; for comparing companies carefully, the average version is more honest.

Worked Example

Say a company reports:

Net income: €12 million
Shareholder equity: €80 million

ROE = €12M ÷ €80M = 15%

For every €1 of shareholder equity, the company generated €0.15 of profit over the year.

What Counts as a Good ROE?

There's no single number that applies everywhere — it depends heavily on the industry:

Capital-light businesses (software, consumer brands with strong pricing power) often post ROE well above 20%, because they don't need much equity tied up in the business to generate profit.
Capital-intensive businesses (utilities, industrials, banks) typically run lower, often in the 8–15% range, because the business requires large amounts of equity and debt just to operate.
Below ~5–8% for a sustained period is often a sign the business isn't generating much value on the capital shareholders have put in — though it's worth checking whether that's cyclical or structural.

As with the P/E ratio and P/B ratio, the useful comparison is against similar companies in the same industry, not against a fixed benchmark.

Where ROE Can Mislead You

This is the part of ROE that matters most, and the part most summaries skip.

Leverage inflates ROE without the business getting better. The formula divides by shareholder equity, not by total assets. If a company takes on more debt to fund the same operations, its equity shrinks relative to its assets, and ROE rises — even though nothing about how well the business is actually run has changed. Two companies with identical operating performance can show very different ROE purely because one carries more debt. Always check debt levels, for example with the debt-to-equity ratio, alongside ROE, not instead of it.

Buybacks have the same effect. When a company repurchases its own shares, it reduces shareholder equity (cash goes out, equity goes down) without changing net income. That mechanically pushes ROE up. A rising ROE driven mostly by buybacks isn't the same signal as a rising ROE driven by better margins or more efficient use of capital — the first is financial engineering, the second is operational improvement.

Negative equity breaks the ratio entirely. If a company has taken on so much debt (or lost so much money) that shareholder equity turns negative, dividing net income by a negative number produces a distorted, sometimes misleadingly positive-looking figure. A negative-equity ROE isn't meaningful and shouldn't be compared to a normal one.

Cross-industry comparisons mislead. A 25% ROE means something different for a software company than for a bank, because the amount of equity each type of business needs to operate is fundamentally different. Compare ROE within an industry, not across them.

FAQ

What is a good ROE?

It depends on the industry. Capital-light businesses like software often post ROE above 20%, while capital-intensive ones like utilities, industrials and banks typically run in the 8–15% range. A sustained ROE below roughly 5–8% can signal the business isn't generating much on shareholders' capital, so compare against similar companies rather than a fixed benchmark.

Why can a high ROE be misleading?

Because the formula divides by shareholder equity, anything that shrinks equity pushes ROE up without the business improving. Taking on more debt and buying back shares both do this, so a high ROE can reflect leverage or financial engineering rather than efficient operations. Always check debt levels alongside it.