What is RoE in the Stock Market?
Return on Equity (RoE) is a metric that measures how efficiently a company utilises its shareholders’ equity to generate profits over a specific period. It is a useful metric to evaluate company performance, as it is calculated by dividing the company’s net profit by its total shareholders’ equity.
Return on Equity (RoE) Formula
Keeping it simple, to calculate RoE, you need to divide the company’s net profit by its total shareholders’ equity. Below is the formula to calculate Return on Equity (RoE).
Real world example: In March 2025, Hero Motocorp had posted a profit of Rs. 4,375.81 cr throughout FY 2025, and total equity was at Rs. 19,272.04 cr. Hence, the RoE of Hero Motocorp stood at 22.71% for the FY25.
and Shareholder’s Equity = 19272.04
44,375.81/19,272.04 = 22.71%.
Hence, RoE = 22.71%.
Now you might be wondering, “What exactly is the company’s net profit and shareholders’ equity? And where can I even find this info?” Don’t worry, we are here to answer all of that for you.
What is Net Profit?
The net profit metric tells us how much a company has earned during a specific period. Additionally, it is a key metric to evaluate a company’s performance. It is calculated after subtracting all the expenses, taxes, and costs from its net sales.
What is shareholders’ equity?
To run daily operations, the company needs money to meet its expenses. The money is collected by companies in several ways, such as taking loans and investments. The invested amount by the company’s shareholders is called shareholders’ equity.
Where can I find the company’s net profit and shareholders’ equity?
Every three months or once a year, companies upload their profit and loss statements on their official website’s investor relations section. Moreover, these statements can also be found on the Indian exchange’s website.
However, to find the statements more easily, you can also check out our stock profile pages, where you will find everything about the company and its financials. Search for the company ‘Here.’
How does Return on Equity (RoE) help to analyse a company’s performance?
Since RoE is measured by dividing net profit by shareholders’ equity. It tells us how efficiently the company has been using its equity over the years. When RoE is analysed over a period of time, it helps investors to understand the company’s financial health.
A consistently higher RoE suggests the company is turning its investments into profits cleverly. Assuming the company has a 20% 3-year RoE CAGR, which means the company has compounded its Rs 20 profit with the equity capital of Rs 100 in the last 3 years. However, relying solely on return on equity is not ideal for assessing any company. Investors must look for what is driving the higher RoE.
How can return on equity be misleading?
It may be a crucial metric in terms of analysing company performance. However, analysing return on equity must be done while looking at other factors. Some companies might have had a good RoE last year, but is it enough to be good? Let us check a few points before thinking if RoE is really good or not.
A hidden RoE trap through debts:
Assuming a company had an RoE standing at 50% last year with a profit of Rs 100 cr and equity capital at Rs 200 cr. Which seems to be an amazing number, but what if the company has 300 cr debt to manage its operations? Do you consider it a good RoE? No, right? While analysing the company’s financials, it is rather important to check out how the company is managing its expenses.
Now, let us take another example. Assuming last year the company’s RoE stood at 20% with Rs 100 cr profit and 500 cr with 0 debt. This can also be considered as good since the company is managing its expenses only through its own capital.
A fake one-time happiness:
Now that we have seen how RoE affects the company’s financing sources, we also need to look at how the company is generating its profit. While some companies may show a rising spike in their RoE, we need to understand where the profit came from. Sometimes a spike in RoE is seen because of the sale of assets or a one-time profit from its non-core business activities. Additionally, it is important to keep track of RoE over the years to get the ideal RoE percentage.
What ROE percentage is considered good for a company?
Being one of the crucial metrics in analysing a company, a good RoE percentage can be considered above 16%-17% and up to 20%. However, the higher the RoE, the better the financial health of the company.
Moreover, the good and bad numbers of RoE depend on the industry type. Some industries RoE might be good at 25%, and some industries’s might be good at 15%.
Good RoE is not about one-time spikes; it is about consistency. Stocks with stable RoE can be considered as good, rather than companies with high & low spikes.
Limitations of Return on Equity
Assessing the company’s financial health, the RoE metric shows how well the company is using its equity capital. However, RoE has its own limitations while assessing the company’s health. Here are some of the limitations of it.
- Ignoring Debts
Ignoring debts is one of the biggest drawbacks of RoE. A high RoE can be misleading in the analysing process if the company debts are not assessed properly since RoE is only calculated with the company’s total equity capital.
- Increasing RoE, Decreasing Equity
RoE can be misleading if the company’s net profit keeps increasing while the company equity stays the same or gets lower. When net profit increases and total equity stays the same, the return on equity number may also be seen getting higher and higher.
- Share buyback effect
Buying shares back, owning shares, means a decrease in equity. A decrease in equity means a spike in return on equity without any actual improved performance.
What should be analysed alongside RoE?
RoE is an indicator telling investors about how well the company is using its own capital. However, it is important to assess how well the company is utilising its capital employed (RoCE), how much debt the company has to its equity (debt-to-equity ratio) alongside its interest coverage ratio (how well the company is able to pay its debts), and how much the company is actually earning from its sales (revenue from operations).
Studying all the ratios above alongside the return on equity ratio will be helpful to make a wise investment decision.