What Is a Good ROE?

Return on Equity is one of the most widely cited profitability metrics — and one of the most easily misread. Understanding what drives ROE (genuine profitability vs. leverage) separates quality analysis from surface-level screening.

This guide explains Return on Equity (ROE) — how to calculate it, what a good ROE looks like by sector, how ROE is distorted by leverage, why ROIC is more reliable for cross-company comparison, and how to use ROE in stock analysis.

Last updated: 2026-05-17

Short Answer

ROE (Return on Equity) measures net income divided by shareholders' equity. A good ROE is generally above 15%, but the number is only meaningful compared to sector peers — and high ROE driven by excessive debt rather than genuine profitability is a warning sign, not a quality signal.

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What It Means

Return on Equity measures how much net income a company generates for each dollar of shareholders' equity. Formula: ROE = Net Income / Shareholders' Equity. A ROE of 20% means the company generated $0.20 of net profit for every $1.00 of book equity. ROE can be decomposed using the DuPont analysis: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier (leverage ratio). This decomposition reveals whether high ROE comes from high margins, efficient asset use, or financial leverage — the last of which is not a genuine quality signal.

Quick Answer

As a general benchmark: ROE above 15% is considered good; above 20% is strong; above 30% often indicates a durable competitive advantage. The S&P 500 median ROE is approximately 15–18%. However, ROE requires sector context — banks and financial companies routinely operate with ROE of 10–15% due to regulatory capital requirements; software companies often show ROE of 30–60%+ because their assets are primarily intangible (not on the balance sheet). The most important question when evaluating a high ROE: is it driven by high net margins and efficient asset use (sustainable), or by high financial leverage (fragile)?

For the full framework, see Return on Equity (ROE).

How to Evaluate ROE in Stock Analysis

ROE analysis is most useful as part of DuPont decomposition — understanding which driver is producing the return tells you whether it is sustainable.

1. Calculate ROE trend over 5 years: a consistently high ROE (above 15–20%) maintained across business cycles suggests structural competitive advantage. Cyclical ROE that spikes at economic peaks and collapses at troughs is a sign of earnings cyclicality, not durable quality.
2. Decompose ROE using DuPont: ROE = (Net Income/Revenue) × (Revenue/Assets) × (Assets/Equity). The first term is net margin (profitability), the second is asset turnover (efficiency), the third is the leverage multiplier. High ROE from a high leverage multiplier is dangerous — it will collapse if the business deteriorates or if refinancing costs rise.
3. Compare ROE to ROIC: ROIC includes debt in the denominator, making it leverage-neutral. If a company's ROE is 35% but ROIC is 12%, the 23-percentage-point gap is leverage-driven. The company has mediocre underlying business returns amplified by debt. If ROE and ROIC are both high (30%+ each), the business generates excellent returns with or without leverage — a genuine quality signal.
4. Benchmark ROE against sector peers: a 25% ROE is excellent for an industrial company but mediocre for a software business. Use sector-specific medians as the reference point, not the market-wide average.
5. Watch for negative equity distorting ROE: companies with extensive buybacks or accumulated losses can have negative book equity, which makes ROE mathematically negative or undefined even if the company is highly profitable. Apple and McDonald's have periodically shown negative or near-zero book equity due to aggressive buybacks — their ROE figures are meaningless in these periods; use ROIC instead.

ROE vs. ROIC: Which to Trust

ROE is widely used but leverage-distorted. ROIC is more analytically sound for comparing business quality because it includes debt in the denominator. When comparing two companies or evaluating whether a company creates economic value, ROIC vs. WACC is the correct framework. ROE is most useful within financial services (where leverage is structural and regulated) and when decomposed via DuPont to understand whether margins, turnover, or leverage is driving the result.

Sector	Typical ROE Range	Key Consideration	Better Paired With
Technology/Software	20–50%+	High intangible assets reduce equity; ROE overstates	ROIC for asset-light comparison
Consumer Staples/Brands	20–40%	Strong brands reduce required equity	FCF yield for capital allocation quality
Financial Services	10–18%	Regulatory capital requirements constrain ROE	ROA alongside ROE — leverage is structural
Industrials/Manufacturing	10–25%	Capital intensity requires more equity	ROIC — verify returns cover cost of capital

DuPont ROE Decomposition Example

Two companies with the same 24% ROE, different drivers:

Company A: Net Margin 12% × Asset Turnover 1.0× × Leverage 2.0× = 24% ROE. Quality-driven: solid margins and moderate leverage.
Company B: Net Margin 5% × Asset Turnover 0.8× × Leverage 6.0× = 24% ROE. Leverage-driven: thin margins propped up by heavy debt.
Same ROE headline. Company A is a quality business. Company B is a leveraged bet — deteriorating conditions will collapse ROE rapidly.

DuPont decomposition takes 5 minutes and completely changes the interpretation. Never accept a high ROE at face value — always decompose it.

Key Takeaways

• Decompose ROE into margin × asset turnover × leverage before drawing conclusions — leverage-driven ROE is not a quality signal.
• Buffett's 15%+ ROE over a full business cycle (with low debt) is one of the most time-tested quantitative moat filters in equity investing.
• ROE can be artificially inflated through share buybacks — if a company repurchases enough stock, book equity eventually goes negative, making ROE meaningless.
• ROIC is the more honest quality metric because it measures return on all capital (debt + equity) and is unaffected by leverage and buyback effects.
• A persistent gap between ROE and ROIC signals high financial leverage — stress-test the model under rising interest rate or credit-tightening scenarios.

For the full framework, examples, and FAQs, read Return on Equity (ROE).

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Common Mistake

ROE's biggest analytical weakness is that it is mechanically inflated by leverage — a company that borrows heavily has less equity on its balance sheet, which automatically increases ROE even if underlying business returns are mediocre. This is why ROIC is generally superior to ROE for comparing business quality across companies: ROIC includes debt in the denominator, making it leverage-neutral. Whenever ROE is significantly higher than ROIC for the same company, the excess is leverage-driven, not quality-driven.

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FAQs

What is a good ROE for a stock?

A good ROE is generally above 15%, with 20%+ considered strong and 30%+ indicating potential competitive advantage. But context matters enormously: capital-intensive industries (airlines, utilities, manufacturing) typically produce ROE of 8–15%; asset-light businesses (software, consumer brands) often produce 25–50%+. Always compare ROE against the sector median and the company's own 5-year trend. A ROE declining from 28% to 16% over three years is more concerning than a stable 14% ROE in a capital-intensive sector.

What is the DuPont analysis of ROE?

DuPont analysis decomposes ROE into three drivers: net profit margin (how much profit per dollar of revenue), asset turnover (how much revenue per dollar of assets), and equity multiplier or leverage ratio (how many dollars of assets per dollar of equity). ROE = Net Margin × Asset Turnover × Leverage. This decomposition is powerful because it reveals whether high ROE comes from genuine operational efficiency (high margins or turnover) or from financial leverage (high equity multiplier). Leverage-driven ROE is fragile; margin and turnover-driven ROE is sustainable.

Is ROE or ROIC more important for stock analysis?

ROIC is generally more analytically reliable because it includes debt in the denominator, making it leverage-neutral. ROE can be inflated by leverage without any improvement in underlying business economics. For evaluating whether a company creates economic value (ROIC vs. WACC comparison), ROIC is the correct metric. ROE is most relevant in financial services (where leverage is structural) and for quick screening. When in doubt, check both: if ROIC and ROE are both high, the quality is genuine. If ROE is materially higher than ROIC, investigate the leverage level.