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ROE
(Return on Equity)
ROE (Return on Equity) measures shareholder profitability: Net Income / Shareholders' Equity. A 20% ROE means $0.20 profit per $1 of equity.
High ROE can signal efficiency (e.g., Apple's 147% via buybacks) or excessive leverage (see D/E). The DuPont formula breaks ROE into ROA, profit margin, and financial leverage. Warren Buffett favors sustainable ROE >15%. However, GAAP adjustments (e.g., stock-based compensation) can distort ROE. The S&P500 average ROE is ~18%. Compare to WACC: ROE > WACC creates value. Financial firms (e.g., JPMorgan) often have volatile ROE due to leverage cycles.
High ROE can signal efficiency (e.g., Apple's 147% via buybacks) or excessive leverage (see D/E). The DuPont formula breaks ROE into ROA, profit margin, and financial leverage. Warren Buffett favors sustainable ROE >15%. However, GAAP adjustments (e.g., stock-based compensation) can distort ROE. The S&P500 average ROE is ~18%. Compare to WACC: ROE > WACC creates value. Financial firms (e.g., JPMorgan) often have volatile ROE due to leverage cycles.