Lesson 01 — Return on Equity (ROE)
Week 07 · Lesson 1 of 3 · Week 07 — Key Ratios Part 1: Profitability
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ROE = Net Profit / Shareholders' Equity × 100 ROE answers: "For every ₹100 shareholders have invested, how much profit does the company generate?" "Sharehold...
What is ROE?
ROE = Net Profit / Shareholders' Equity × 100
ROE answers: "For every ₹100 shareholders have invested, how much profit does the company generate?"
🗣️
"Shareholders ne jo paisa lagaya, uspe kitna return mil raha hai."
Benchmarks
| ROE | Quality signal |
|---|---|
| > 20% | Excellent — high-quality business |
| 15–20% | Good |
| 10–15% | Average |
| < 10% | Below average — capital not deployed efficiently |
The DuPont Breakdown
ROE can be decomposed to understand WHERE returns come from:
ROE = Net Margin × Asset Turnover × Equity Multiplier
(profitability × efficiency × leverage)
| Company type | Driver |
|---|---|
| IT (TCS) | High net margin |
| FMCG (HUL) | High asset turnover |
| Banks (HDFC) | High equity multiplier (leverage) |
High ROE from leverage
If ROE is high mainly because of debt (equity multiplier), it's risky. Check the debt-equity ratio.
What to look for
- ROE > 15% consistently for 5+ years
- Compare with cost of equity (~12-14% in India). ROE must EXCEED cost of equity to create value.
- Rising ROE = improving business. Falling ROE = deteriorating.
Key takeaway
ROE is the single best ratio for judging business quality. Great compounders have high AND stable ROE.