Return on Equity
Net profit expressed as a percentage of shareholders' equity, measuring what the business earns on the owners' capital.
Formula
ROE = Net Profit Attributable to Shareholders / Average Shareholders' Equity x 100
Unit
%
In depth
Return on equity is the headline measure of how effectively a company uses its owners' money, and a business sustainably earning above its cost of equity creates value while one below it destroys value even while reporting profits. Its trap is leverage: because equity is the denominator, borrowing more raises ROE without any operational improvement, and the DuPont decomposition exists to separate the two. A buyback shrinks equity and lifts ROE mechanically for the same reason. Comparing ROE across companies without checking their debt levels is comparing financing decisions, not business quality.
Worked example
Net profit ₹90 crore on average equity of ₹450 crore gives ROE of 90 / 450 x 100 = 20%. Against a cost of equity of 12%, the business earns an 8-point spread — the arithmetic behind trading at 4 times book.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Return on Equity” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.