Return on Equity (TTM)

How it relates

Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.÷Total Shareholders' EquityTotal shareholders' equity is the residual value of the company after all liabilities are subtracted from assets. It represents the book value belonging to the company's owners.=Return on Equity (TTM)

Where it fits

Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.→Return on Equity (TTM)

Return on Equity (TTM)→Profitability

Return on equity (ROE) measures the profit a company generates relative to shareholders' equity investment. This fundamental metric answers how effectively management uses shareholder capital to create returns and is central to valuation frameworks, compensation benchmarks, and financial analysis. High ROE indicates efficient capital utilisation, though context matters significantly.

The calculation:

ROE = Net Income (TTM) / Average Shareholders' Equity × 100%

For example, if a company earns $100 million with average equity of $500 million, ROE is 20%. For every $1 shareholders have invested, the company generates $0.20 in annual profit.

DuPont analysis breaks ROE into three components:

ROE = Profit Margin × Asset Turnover × Financial Leverage
ROE = (Net Income/Revenue) × (Revenue/Assets) × (Assets/Equity)

This reveals whether ROE is driven by profitability, efficiency, or leverage—a crucial distinction.

Interpreting ROE levels:

ROE > 20%: Excellent; suggests competitive advantages
ROE 15-20%: Strong; above-average capital efficiency
ROE 10-15%: Average; acceptable for many industries
ROE < 10%: Below average; may indicate competitive challenges
Negative ROE: Losses eroding equity; needs investigation

Critical caveats:

Leverage effect: Companies can inflate ROE by taking on debt, increasing risk while boosting returns mathematically
Negative equity: ROE is meaningless when equity is negative (accumulated losses exceed capital)
Industry variation: Compare ROE within industries; capital requirements differ dramatically
Buyback distortion: Share repurchases reduce equity, potentially inflating ROE without operational improvement

High ROE combined with low leverage indicates genuine operational excellence. High ROE from excessive leverage represents elevated risk. Warren Buffett famously seeks companies with consistently high ROE (15%+) achieved without excessive debt, viewing this as a sign of durable competitive advantage.

Track ROE trends over 5-10 years rather than single years. Sustainable high ROE is far more valuable than a single exceptional year driven by one-time factors.