Profitability
Return on Equity
ROE
What it is
ROE measures the profit generated for each dollar invested by shareholders. It's a test of management quality: are they able to grow the money entrusted to them?
How to read it
An ROE above 15% sustained over several years is generally a sign of a quality company with a durable competitive advantage. The best companies (Apple, Visa, etc.) maintain ROE above 25% for decades.
Common reference points
- Excellent — superior quality> 20%
- Good12 – 20%
- Acceptable8 – 12%
- Weak — creating little value< 8%
Orders of magnitude, not a rule: the same number does not mean the same thing from one sector to the next.
What it does not tell you
An ROE artificially boosted by leverage (debt-financed buybacks) is not the same as one generated by operational profitability. Always look at debt-to-equity alongside.
Other measures — Profitability
Educational content. Polaris is not a registered investment adviser and makes no recommendation.