6.4What is ROE (Return on Equity)?
1What is it?
ROE shows how much profit a company makes with the shareholders’ money.
2Why does it exist?
It is a key measure of management efficiency: how well they turn your money into profit.
3Real-life example
You put ₹1 lakh into a shop and it earns ₹20,000 a year. Your return on equity is 20%.
4Diagram
High value means…
Efficient use of capital (15%+ is often considered good).
Low value means…
Poor returns on capital; possibly a weak business.
Is high or low good?
Higher is better, if it is not caused by high debt.
5Calculation
ROE = Net profit ÷ Shareholders’ equity × 100
- Net profit = ₹1,000 cr; equity = ₹5,000 cr.
- ROE = 1,000 ÷ 5,000 × 100 = 20%.
Every ₹100 of shareholder money earns ₹20 a year.
6Risks
- Debt can inflate ROE (less equity, same profit).
- One-off profits distort it.
- Negative equity makes it meaningless.
7Practical use
Always compare a ratio with (1) the company’s own history and (2) other companies in the same industry. A single number on its own means little.
8Quick revision
- ROE = profit ÷ equity.
- 15%+ is usually good.
- Check debt alongside.
9Knowledge check
Q1. Profit ₹300 cr, equity ₹1,500 cr. ROE?Show answer
20%.
Q2. How can debt inflate ROE?Show answer
Borrowing instead of equity reduces equity in the formula.
Q3. Is 8% ROE strong?Show answer
Usually weak, lower than many safe alternatives.
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