ROE: the headline measure of business quality and its main trap

Return on equity (ROE) answers the question a shareholder hands money to management for: how much profit the company earns on each unit of their capital.

What a high value means

A consistently high ROE over years is almost always a sign of competitive advantage. If earning that much were easy, competitors would arrive and drive the return down to the market average. Since they have not, something is stopping them: a brand, a licence, a network, scale.

21,99 %

The trap

ROE is a fraction with a small denominator. A company that bought back many of its own shares or accumulated losses has tiny equity — and will show a spectacular return purely as arithmetic.

How to check

Read ROE alongside leverage and Return on assets (ROA). Return on assets cannot be improved simply by borrowing: the denominator grows with the cash.

If ROE is high while ROA is low, the return was manufactured by leverage rather than by the business. That is not a verdict, but it is a different story and a different risk.