What Is ROE? A Beginner’s Guide to Return on Equity

If you’ve ever tried to analyse a company before investing, you might have come across the term ROE or Return on Equity. But what does it actually mean? Think of Return on Equity as the "report card" of a company that tells you how well it's using your money (as a shareholder) to generate profits.

What is ROE?

Return on Equity tells you how much profit a company makes using the money invested by its shareholders. In simple terms, ROE shows how efficiently a company is using your money to make more money.

Imagine you give ₹1,00,000 to your friend to start a business. After one year, your friend returns and says, "I made ₹20,000 profit using your money."

Then:

Your friend’s Return on Equity= (₹20,000 / ₹1,00,000) × 100 = 20%
This means: For every ₹1 you gave, they generated ₹0.20 in profit.

This is exactly what ROE measures for companies listed on the stock market

How to Calculate ROE?

Here is how to calculate the Return on Equity:

The formula of Return on Equity is:

Return on Equity = Net Profit / Shareholders’ Equity x 100

Where,

Net Income = Business profit after all taxes and expenses.
Shareholders’ Equity = Total assets minus total liabilities (the net value belonging to shareholders)

Example of ROE

For Example, suppose that a company has,

	Value
Net Income	20,00,000
Shareholder equity	1,00,00,000

Earnings per share = 20,00,000 / 1,00,00,000 = ₹ 0.2 or 20%

So this means the company generates a 20% return on every equity invested.

How Does ROE Work?

Return on Equity measures the company's ability to generate profits without borrowing too much. Let's take an example, think Return on Equity is like a school exam for a company.

The company is the student
The investor's money is the study material
The profit is the marks scored

Return on Equity has two easy scenarios:

High ROE

The company is smart and knows how to use your money wisely.
It doesn’t waste money, and makes a good profit from it.
Like a student who studies hard and scores well.
Example: Asian Paints has ROE 25%, very good

Low ROE

The company is not using your money properly.
Maybe the money is lying idle, or the business is not working well.
Like a student who has all the books but still fails the exam.
Example: Tata Motors has ROE 7%, not so good

What is a Good ROE?

Well, a good Return on Equity depends on the Industry,

A 15% to 20% Return on Equity is strong for most sectors.
The average Return on Equity is 16.5% for U.S. companies.
Compare Return on Equity to the industry peer for meaningful analysis, as capital intensity and the profit margin also vary by sector.

Here is a quick review:

ROE (%)	What it Means
Below 10%	Bad: Money is being wasted
10% - 20%	Okay: Average company
Above 20%	Good: Smart business

Also read: What is ROCE Vs ROE in the Share Market?

Conclusion

In conclusion, if you’re just starting with stocks, don’t get confused by too many numbers. ROE is one of the easiest tools to check if a company is worth your money. Use it smartly, compare it, double-check it, and remember this: "high ROE doesn't mean 'buy now'. It means 'dig deeper'". We hope this blog has been helpful for you.

About the Author

Saniya

I'm a finance content writer with a BBA in FinTech, passionate about simplifying money matters for everyday Indians. I break down complex topics like investments, savings, and digital finance into easy, relatable content. My goal is to help you in a way that’s easy to understand, jargon-free, and actually useful in real life.

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