Glossary
Return on Equity (ROE)
Net income as a percentage of shareholder equity.
ROE = Net Income / Average Shareholder Equity × 100%. It measures how efficiently management converts equity capital into accounting profit, and it is the single most-cited quality metric in fundamental analysis.
Sustained ROE above 15–20% is the hallmark of a high-quality business with a durable competitive moat. Warren Buffett famously prioritises ROE over headline earnings growth in screening.
Decompose via DuPont: ROE = Net Margin × Asset Turnover × Equity Multiplier. Two firms can both show 18% ROE — one through fat margins, the other through heavy leverage. The leveraged version carries more downside risk in a stress event.