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Return on Equity (ROE): What It Means and What's a Good Number

Return on equity is the ratio Warren Buffett has cited more than almost any other as a measure of business quality. It tells you how efficiently a company turns shareholders' capital into profit — and a consistently high ROE is one of the hardest things to fake.

How ROE is calculated

ROE = net income ÷ shareholders' equity. A 20% ROE means the company earns $0.20 for every $1 of equity its shareholders own. The compounding power of a high ROE is why quality businesses — ones that earn high returns on the capital they retain — tend to be worth more than the sum of their parts.

What counts as a good ROE

As a starting threshold, 15% or higher sustained over several years signals a quality business. The most durable compounders typically run ROEs above 20% even as they grow. Context matters, though: capital-light businesses (software, asset-light services) naturally run higher ROEs than capital-intensive ones (utilities, manufacturers), so compare within a sector.

Where ROE can mislead

High leverage inflates ROE — if a company borrows heavily, it shrinks the equity denominator and the ratio rises even with flat profits. Always check that a high ROE comes with manageable debt and isn't the result of financial engineering. When in doubt, look at return on invested capital (ROIC) as a leverage-neutral cross-check.

Frequently asked

What is a good ROE for a stock?

As a starting point, 15% or higher sustained over several years indicates a quality business. The most durable compounders typically run ROEs above 20% even as they scale. Always compare within the same sector, since capital-intensity varies widely.

Can ROE be too high?

Paradoxically, yes. An extremely high ROE sometimes means the equity denominator has been eroded by large buybacks or write-downs rather than reflecting genuine earnings power. Cross-check with return on invested capital (ROIC) or return on assets (ROA) to confirm the quality is real.

How does ROE relate to a stock quality score?

ROE feeds directly into the Profitability pillar of tickerseer's SeerAI quality score, alongside profit margins and return on assets. A high quality score almost always comes with a track record of above-average ROE sustained over multiple cycles.