ROE ratio

Return on equity (ROE) is a profitability ratio that measures how much net profit a company generates for every unit of money that shareholders have invested in it. In plain terms, it answers a simple question: how good is this business at turning the owners' capital into earnings? Because it is expressed as a percentage, ROE lets you compare very differently sized companies on an equal footing, and it is especially useful within the same industry, where typical returns are broadly similar.

A consistently high ROE often signals a well-run, efficient company with a durable competitive advantage, which is why long-term investors watch it closely. It should be read with care, though: heavy debt can inflate ROE by shrinking the equity base, so a high figure is not automatically a healthy one. Analysts also track it over several years, since a stable or rising trend usually says more than a single snapshot. In everyday practice, investors use ROE to screen stocks, managers use it to judge how effectively they are deploying capital, and lenders use it as one clue to a firm's financial strength.