ROE (Explained Very Simply)
ROE tells you:
“How good a company is at using your money to make profit.”
Profit ÷ Shareholder Money = ROE
Basic Idea
Imagine this:
- You invest ₹100 in a business
- The business makes ₹20 profit
So:
20 ÷ 100 = 20% ROE
This means:
The company makes ₹20 for every ₹100 invested
ROE = how hard your money is working
What It Really Means
- High ROE → company uses money well
- Low ROE → company is inefficient
Higher is usually better — but don’t be blind
What is a Good ROE?
- 15%+ → good
- 20%+ → very strong
But always compare with similar companies.
Compare inside same industry only
Why Some Companies Have High ROE
- Strong business model
- Good management
- High profit margins
These companies grow faster over time.
High ROE businesses compound wealth faster
Hidden Danger (Very Important)
A company can show high ROE by using too much debt.
Less own money + more borrowed money = higher ROE (fake strength)
High ROE with high debt = risky
How Investors Use ROE
- Find strong businesses
- Check management quality
- Compare companies
Best use:
- High ROE + low debt = strong company
ROE shows quality, not cheapness
Use With PE & PB
ROE alone is not enough.
- PE → price
- PB → value
- ROE → quality
Best setup: Good ROE + reasonable PE + fair PB
Common Mistakes
- Chasing very high ROE blindly
- Ignoring debt
- Not checking consistency
One year high ROE means nothing — consistency matters
Final Understanding
Think of ROE like this:
“How much profit is this company making from my money?”
Great companies don’t just earn — they use money efficiently