Return on Equity

Explanation

ROE = Net Income / Shareholders' Equity. A ROE of 20% means the company generates $20 of profit for every $100 of equity. The DuPont decomposition breaks ROE into three components: profit margin × asset turnover × financial leverage. This reveals whether high ROE comes from margins (good), efficiency (good), or leverage (risky). Average S&P 500 ROE is approximately 18-20%. Companies consistently maintaining ROE above 20% typically possess durable competitive advantages. However, ROE can be artificially inflated by high debt (which reduces equity) or share buybacks.

Formula

How Stoquity Uses This

Stoquity incorporates return on equity analysis across its portfolio management platform, providing real-time monitoring and AI-powered insights for every portfolio.