Return on equity (ROE)
Returns on capitalNet income earned per dollar of shareholders' equity in the latest fiscal year.
Formula
ROE = net income ÷ shareholders' equity
Why it matters
ROE measures how productively the company employs the capital that belongs to its owners. A business that reliably earns 20% on its equity can compound internally at a high rate without needing outside money; one earning 5% destroys value relative to what investors could earn elsewhere. Over long holding periods, the return an investor earns tends to converge toward the business's return on capital, which is why ROE carries 15 of the 100 points in our quality score.
What good looks like
Above 20% sustained over years is excellent (full quality-score credit). 12–20% is good, 6–12% mediocre, and below 6% suggests capital is not earning its keep. Consistency matters more than any single year.
Caveats
ROE rises mechanically as equity shrinks, so large buybacks or write-downs can produce spectacular ROE with no change in the business — some heavy repurchasers have tiny or even negative equity, making ROE meaningless. Leverage also inflates ROE: the same operating performance on a more indebted balance sheet shows a higher number. Always read ROE together with debt/equity and cash ROIC, which includes debt in the denominator.