ROE measures how efficiently a company generates profits from shareholders' equity, indicating management effectiveness.
Return on Equity is a profitability metric that shows how much profit a company generates for each dollar of shareholders' equity. High ROE indicates efficient use of equity capital and strong management performance. It's one of Warren Buffett's favorite metrics for identifying companies with sustainable competitive advantages and high-quality management teams.
A company with $2B net income and $10B equity has ROE of (2 / 10) × 100% = 20%. For every dollar of equity, the company generates $0.20 in profit.
ROE above 20% is generally considered excellent, indicating highly efficient use of capital and strong competitive advantages.
ROE below 10% may suggest inefficient operations, high capital intensity, or weak competitive positioning.
Warren Buffett looks for companies with consistent ROE above 15%. However, ideal ROE varies by industry and capital structure.
