What Is Return on Equity?

Return on Equity answers a narrow but important question: for every rupee that shareholders have left inside the business, how much profit does the business produce in a year?

The definition#

ROE is net profit divided by shareholders' equity. If a company earns ₹120 crore on an equity base of ₹800 crore, its ROE is 15%.

That is the whole formula. The difficulty is not the arithmetic — it is knowing what the number is actually telling you.

Why a high ROE is not automatically good#

The same 15% can be produced in very different ways. A useful habit is to split ROE into three parts:

Margin — how much profit survives from each rupee of sales
Asset turnover — how much sales the assets generate
Leverage — how much of those assets are funded by debt

A business can raise its ROE simply by borrowing more. The profit per rupee of equity rises because the equity base shrinks, not because the business got any better. Two companies reporting identical ROE can therefore be describing completely different realities.

What to look for instead#

Read ROE alongside the debt on the balance sheet, and read it across several years rather than one. A business that has sustained a high ROE for a decade without heavy borrowing is telling you something durable about its economics. A single good year is telling you very little.