Fundamental Glossary / Profitability Metrics
Return on Equity (ROE)
Profit after tax divided by shareholders' equity. The return owners earned on the book capital they have in the firm.
Formula
PAT / average shareholders' equity. Average equity is usually (opening + closing) / 2.
What it means
ROE is the compound engine of book value when earnings are retained. A company that earns 18% on equity and pays no dividend can grow book value at about 18%, before new share issues.
DuPont splits ROE into net margin, asset turnover, and financial leverage. The same 18% can come from a wonderful business or from a lot of debt.
How to read it
A high and stable ROE, achieved without extreme leverage, is a mark of a strong franchise. A high ROE that appears only after equity has been shrunk by write-offs or buybacks above book needs a second look.
What to watch
Negative equity makes ROE meaningless. A very small equity base after years of buybacks inflates ROE. Compare with ROCE and ROIC, which are less sensitive to the financing mix.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.