Return on Equity (ROE): formula and how to read it

Profit made on shareholders' money. Trailing net income divided by average shareholders' equity. Not calculated when equity is negative.

Stock Meadow groups it under Profitability, and shows it in tables as ROE.

ROE = net income over the trailing twelve months ÷ average shareholders' equity

A company that earned $15 million with average shareholders' equity of $100 million has an ROE of 15%. The numbers are made up for illustration.

A higher ROE means more profit for each dollar of equity. It is most meaningful when a company sustains it over many years.

When Stock Meadow ranks stocks, a higher figure scores better.

• Debt boosts ROE. A heavily indebted company can show a high ROE with a fragile balance sheet, so read it with a leverage measure.
• Buybacks shrink equity and lift ROE without any improvement in the business.
• Not calculated when equity is negative, because the ratio would be meaningless.

How Stock Meadow handles gaps. Usually blank when shareholders' equity is negative, or the reported figures don't agree.

Treat any single metric as one clue, and read the company's financial statements before drawing a conclusion. Stock Meadow's figures are research tools based on reported data, not investment advice.

In Weighted ranking, Z-score composite and Balanced (no weak link), you choose the metrics and weights yourself, so you can include it in a custom score.

No fixed-recipe model scores it.

Read about every scoring model on the scoring models page.

• Return on Invested Capital (ROIC): profit made on all money invested in the business.
• Net Debt to EBITDA: years of earnings needed to pay off debt.
• Price-to-Book Ratio (P/B): what you pay for each dollar of net worth on the books.

What is a good return on equity?

Higher is better, and many investors look for returns that hold up year after year. Compare with companies in the same industry, and check debt, because leverage can inflate ROE.

What is the difference between ROE and ROIC?

ROE measures profit relative to shareholders' equity only, while ROIC measures operating profit relative to all invested capital, debt included. ROIC is harder to inflate with borrowing.

Is a higher or lower ROE better?

When Stock Meadow ranks stocks, a higher figure scores better. That is a ranking convention, so read ROE alongside other measures and compare similar companies.

Why is ROE blank for some stocks?

It is usually blank when shareholders' equity is negative, or the reported figures don't agree. Stock Meadow leaves the figure blank rather than guessing it.