What Is ROE (Return on Equity)?
ROE stands for Return on Equity — it measures how much profit a company generates from each dollar of shareholders' equity. This metric directly reflects how effectively management is using invested capital.
Formula:
ROE = Net Profit / Average Shareholders' Equity x 100%
An ROE above 15% is generally considered good. Above 20% is excellent. However, this number should be compared within the same industry since each sector has different characteristics.
Simple Explanation
You have $100,000 and are considering where to invest:
- Savings account: earns $6,000/year. "ROE" = 6%
- Open a bubble tea shop: earns $25,000/year. "ROE" = 25%
- Invest in a pho restaurant: earns $12,000/year. "ROE" = 12%
Which would you choose? Clearly the bubble tea shop uses capital most efficiently. ROE in stocks works exactly the same: it tells you how well company management converts shareholders' equity into profit.
Real-World Example
Comparing ROE of 3 listed consumer goods companies in Vietnam:
| Stock | Equity | Net Profit | ROE |
|---|---|---|---|
| VNM (Vinamilk) | 28,000B VND | 5,600B VND | 20.0% |
| MSN (Masan) | 35,000B VND | 3,500B VND | 10.0% |
| SAB (Sabeco) | 18,000B VND | 4,500B VND | 25.0% |
Analysis:
- SAB has the highest ROE (25%) — every 100 VND of shareholders' equity generates 25 VND in profit. The beer industry benefits from strong brand advantages and high margins.
- VNM achieves an ROE of 20% — stable across many years, reflecting its leading position in the dairy sector.
- MSN has the lowest ROE (10%) — Masan is investing heavily in the retail segment (WinMart) and has not yet optimized efficiency.
Note: These figures are illustrative. Always check the latest actual data.
ROE and Financial Leverage
An important caveat: high ROE is not necessarily good if the company uses excessive debt. When shareholders' equity is small (due to high debt), ROE gets "inflated" because the denominator is small. Always look at ROE alongside the Debt/Equity ratio.
Why It Matters for Investors
Assessing business quality. ROE is the most direct measure for the question: "Is management skilled at generating profit from shareholders' capital?" Legendary investor Warren Buffett consistently prioritizes companies with stable ROE above 15% over many years.
Predicting growth. Companies with high ROE and a high reinvestment rate (retaining rather than distributing all profits) will grow faster. The formula: Sustainable Growth = ROE x Retention Rate.
Stock screening. ROE is one of the first filters when screening stocks. Filtering for ROE above 15% quickly eliminates companies that use capital inefficiently, narrowing the list from hundreds of tickers to a few dozen worth researching.