ATLASReturn on equity (ROE)
Investing glossary · Valuation and fundamentals
Net income divided by shareholders' equity: the profit a company earns on the capital its owners have invested.
Definition
Return on equity (ROE) divides a company's net income by its shareholders' equity. It answers "for every unit of capital the owners have put in or left in the business, how much profit does it earn each year?" A consistently high ROE usually points to a business with a competitive advantage.
ROE can be inflated by debt: borrowing more shrinks equity relative to profit and lifts the ratio without making the business better. It is also distorted for companies with very small or negative equity, for example after large buybacks. So read ROE together with debt levels and margins.
Formula
ROE = net income ÷ shareholders’ equity
Net income over the last 12 months; shareholders' equity from the balance sheet (often averaged over the period).
Worked example
JPMorgan Chase & Co. (JPM) earns a return on equity of 17.8%: for every 100 units of shareholder equity it earns about 17.8 units of profit a year. Its net margin is —.
A high ROE with a healthy margin suggests the business itself is profitable; a high ROE with thin margins and a lot of debt deserves more caution.
How ATLAS uses it
ATLAS shows ROE alongside margins and growth in the key numbers, and it is hidden when equity is so small or negative that the figure would mislead.
Related in ATLAS: Financials →Browse all ATLAS tools →See it on a real stock
The example above uses these companies. Open their pages for the full numbers:
Frequently asked questions
Is a higher ROE always better?
Not always. If it comes from heavy debt it makes the company riskier. It is best when it is high and stable with moderate debt.
How is ROE connected to P/B?
Price-to-book equals P/E multiplied by ROE. Companies with a higher ROE tend to trade at higher price-to-book ratios.
Related terms
Put the idea to work on your own stocks
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Try ATLAS →Not investment advice. ATLAS estimates are produced by statistical models from public data; they can be wrong and past performance does not predict future results. Consider your own situation before investing. Disclaimer