Building up · 4 min read

ROE: what the owners' money earns

Return on equity asks a simple question: for every dollar shareholders have in the business, how much profit does it produce each year?

A steady 20% ROE means management turns owner money into profit efficiently. Under 10% usually means the business struggles to justify the capital it uses.

One catch: heavy borrowing flatters ROE, because debt shrinks the equity in the denominator. Always read ROE next to the debt figure.

Remember

ROE is the interest rate the business pays its owners — check the debt behind it.

See a real example

Compare Apple, Johnson & Johnson and McDonald's

Look at ROE, then look at each one's debt.

What this shows

A high return can come from a great business or from a lot of borrowing. The pair of numbers tells you which.

Quick check

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Return on equity compares profit to…

Next on your pathROIC: the fairest test of a business

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