What is ROE in the Stock Market? Meaning, Formula & Interpretation for Investors

Return on Equity (ROE) is a profitability ratio that expresses a company’s net income as a percentage of shareholders’ equity, showing how efficiently management uses investors’ capital to generate profit .

It’s calculated as: ROE = (Net Income ÷ Shareholders’ Equity) × 100

For example, Jasmine started her handmade soap business in 2024 with ₹7,00,000, which included ₹5,00,000 of her own savings and ₹2,00,000 from friends. By the end of the first year, she made a net profit of ₹1,40,000, so her ROE was 20% (₹1,40,000 ÷ ₹7,00,000 × 100). 

Motivated by her success, she reinvested her profits and added another ₹1,00,000 in equity the next year, making her average equity ₹7,50,000. Her profit rose to ₹1,65,000 in the second year, increasing her ROE to 22%. This rise showed she was using her capital more effectively, and a growing ROE indicated her business was healthy and attractive to investors. In this blog, you will learn about ROE in the stock market, its formula, and its interpretation for investors.

The Formula & How to Calculate It?

ROE (%) = (Net Income ÷ Shareholders’ Equity) × 100

This tells us how much profit a company makes for every ₹1 invested by its shareholders. The higher the ROE, the better the company is at using investor money to earn profit.

You can find net income in the profit and loss statement, and shareholders’ equity in the balance sheet. Instead of using just the year-end equity, it's better to use average equity from the beginning and end of the year for a more accurate result. Also, if the company pays preference dividends, subtract those from net income before using the formula.

Example with Ganpat:

Ganpat owns a textile business. In the last financial year, his company made a net profit of ₹18,00,000. At the start of the year, his shareholders’ equity was ₹85,00,000, and at the end, it was ₹95,00,000. The average equity during the year is:

(₹85,00,000 + ₹95,00,000) ÷ 2 = ₹90,00,000

Now, let’s calculate ROE:

Tip:
If you're unsure about a term like “shareholders’ equity”, just think of it as the total amount invested by the owners in the company, plus any profits the business has kept over time.

So, ROE simply shows whether the company is using that money wisely.

Also Read  - How to Analyse Stocks – Methods & Tips for Smart Investing

What Is a “Good” ROE? Industry Benchmarks & Risks

Before judging whether a company’s ROE is “good”, it’s important to look at the industry average and how the company compares. Below is a simple guide to help you understand what different ROE values might mean.

It’s best to compare ROE within the same industrybecause sectors like IT or retail usually show higher ROE, while others like utilities or manufacturing often show lower figures.

Tip:

A very high ROE (above 25%) can sometimes be a red flag. If a company has large debts, its equity goes down, which pushes ROE up, even if the company isn’t truly more profitable. So, always check debt levels and not just ROE.

Read More – What is the PE Ratio in the Share Market?

A good ROE depends on the business type. Don’t compare across unrelated industries, and always use ROE alongside other financial checks to understand a company’s real performance.

RoE Insights via DuPont Analysis & Investor Takeaways

DuPont analysis helps you understand what really drives a company’s ROE. Instead of just looking at the final ROE number, DuPont breaks it into three parts:
 

• Net Profit Margin: How much profit the company makes from its sales
   
• Asset Turnover: How well the company uses its assets to generate sales
   
• Equity Multiplier: How much of the company’s assets are funded by equity versus debt

Together, these parts show whether the company is doing well because of strong profits, efficient use of assets, or high borrowing.

Example: Ganpat’s Business

Ganpat owns a packaging company. Here’s how his numbers look for the year:
 

Ganpat’s company shows a 40% return on equity (ROE), which looks very good at first. But when we use DuPont analysis, we see that part of this high return comes from a high equity multiplier of 2.0. This means Ganpat is using more debt to run his business.

Using debt can increase profits, but it also adds financial risk. If profits or sales go down, the company might have trouble paying its debt. For investors, a high ROE caused by borrowing should make them check the company’s debt, interest payments, and cash flow carefully.

DuPont analysis helps investors see the overall picture. It shows whether a company earns high returns through good management and operations or by borrowing money. This makes it a useful tool to judge if a company is likely to do well and be a safe investment in the long term.

Tips for Investors:
 

• Look for companies with steady ROE over time, ideally above 15% for most industries, without spiking due to debt alone.
   
• Compare DuPont components across peers in the same industry to spot strengths or weaknesses.
   
• Always check other ratios like ROCE (Return on Capital Employed), ROA (Return on Assets), and debt ratios to get the full picture.
   
• Be cautious when ROE rises, mainly due to high leverage, less equity, and more borrowing can boost ROE, but also heighten financial risk

DuPont analysis gives you a clearer view of how a company earns its returns. It helps you invest smarter by showing whether a business is truly strong or just using more debt to look good.

Conclusion

Return on Equity (ROE) is a key ratio that tells you how well a company uses investors' money to make a profit. A strong and steady ROE shows that the company is managing its resources wisely. But smart investors don’t just look at the number; they dig deeper, using tools like DuPont analysis and comparing ROE with other financial ratios. This gives an overall picture of a company’s real strength.

FAQs

1. Can a company have a high ROE and still be risky?

Yes. A company might use a lot of debt to make its ROE look high. This can increase risk, especially if profits drop or interest rates rise. Always check debt levels along with ROE.

2. Is a higher ROE always better than a lower one?

Not always. A high ROE might be great, but only if it’s stable and supported by strong profits or efficient operations. If it jumps suddenly, check whether it’s caused by debt or accounting tricks.

3. What ROE is considered good in the Indian stock market?

In most industries, an ROE between 15% and 20% is considered strong. In sectors like tech or retail, even above 20% can be normal. But for utilities or manufacturing, even 10–12% can be good.

4. How often should I check a company’s ROE?

You should check it at least once a year, when the company releases its annual report. If you're an active investor, checking ROE every quarter along with other financial metrics is a good habit.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?