What is Return on Equity (ROE): A beginner-friendly guide with examples
Return on Equity (ROE) is one of the most important profitability ratios that investors track to assess how efficiently a company is using its shareholders' capital to generate profits.
In simple terms, ROE answers this question:
'For every rupee invested by shareholders, how much profit is the company generating?' What is ROE?
Formula:
ROE = (Net Profit / Shareholders' Equity) × 100
It's expressed as a percentage.
For example:
If a company earns Rs 200 crore in net profit and has Rs 1,000 crore in equity, then:
ROE = (200 ÷ 1,000) × 100 = 20%
This means:
For every Rs 1 of shareholder money, the company generates 20 paise in profit annually. Why is ROE important?
Measures profitability from shareholders' perspective
A higher ROE means the company is making good use of investors' money.
Helps in stock comparisons
Investors use ROE to compare profitability across companies in the same sector.
Indicates management efficiency
It shows how well the management is using the company's net assets to create profits. What is a good ROE?
It depends on the industry, but here's a general benchmark: Industry Good ROE Range FMCG, Consumer Goods 20% and above IT and Technology 15% to 25% Banks and Financials 10% to 20% (due to regulatory capital requirements) Infrastructure, Utilities 8% to 15%
Key point:
Sectors with low capital needs like FMCG tend to have high ROE, while asset-heavy industries like power and infrastructure generally have lower ROEs. Real-life example: Company Net Profit (Rs crore) Shareholders' Equity (Rs crore) ROE HUL 9,500 39,000 24.3% Infosys 25,800 1,20,000 21.5% NTPC 18,000 1,20,000 15% HUL and Infosys deliver high ROE due to high margins and low capital needs.
NTPC has lower ROE because it operates in a capital-intensive sector. Things to watch while using ROE: High debt can artificially inflate ROE
If a company borrows heavily, equity shrinks relative to profits, making ROE look better. Check debt-to-equity ratio along with ROE for full picture.
Compare within industry
A 15% ROE in utilities may be excellent, but poor in consumer goods.
Track ROE trend over years
A falling ROE over 3-5 years could signal declining profitability.
Check consistency
A one-time profit spike shouldn't be mistaken for sustainable high ROE. ROE vs. ROCE: What's the difference? Metric Measures Good for analyzing ROE Profitability relative to equity only Shareholder returns ROCE (Return on Capital Employed) Profitability relative to total capital (equity + debt) Overall capital efficiency Final takeaway:
ROE tells you how well a company turns investor money into profit.
It's a key indicator for long-term investors, especially when comparing companies within the same sector.
For better analysis, always pair ROE with other ratios like Debt-to-Equity and ROCE.
Ahmedabad Plane Crash
Aditya Bhagchandani serves as the Senior Editor and Writer at Business Upturn, where he leads coverage across the Business, Finance, Corporate, and Stock Market segments. With a keen eye for detail and a commitment to journalistic integrity, he not only contributes insightful articles but also oversees editorial direction for the reporting team.
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