What is ROE?
ROE measures how much profit a company generates with shareholder money. It shows the percentage return on shareholder equity.
Think of it like this
You invest $10,000 in a friend's business (your equity). If they generate $1,500 profit yearly, your ROE is 15%. Compare to a bond paying 5% - the business gives 3x better returns!
Formula
ROE = Net Income / Shareholder Equity- Net Income: Company's total profit after all expenses
- Shareholder Equity: Total assets minus total liabilities
Why it matters
- Shows how profitable the company is for owners
- Higher ROE = better returns for shareholders
- Compare to interest rates and bonds
- Warren Buffett looks for consistent high ROE
What's a good value?
< 10%
Poor
Below bond returns
10-15%
Average
Meeting basic expectations
15-20%
Good
Creating solid value
> 20%
Excellent
Exceptional returns
Real-world example
Coca-Cola ROE: 40% - strong brand power. Banks: 10-12% - heavily regulated. Tech companies: 20-30% - high margins. Utilities: 8-10% - stable but low returns.
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