What is ROE?
Return on equity (ROE) measures annual accounting profit relative to shareholders’ book equity. Annual net income of 100 on average equity of 1,000 gives ROE of 10%: 10 of profit per 100 of equity.
ROE = annual net income ÷ average shareholders’ equity × 100
It is neither your stock return nor dividend yield. A stock’s market price differs from book equity, and companies do not distribute all their profit.
How do you calculate ROE?
Net income is profit after expenses, interest and taxes. Equity is the book value left after subtracting liabilities from assets. To calculate annual ROE, divide net income by average equity and multiply by 100.
Apple’s ROE was above 100%
Using Apple’s FY2024 filing gives ROE of 157.41%. The company earned more in annual profit than its average book equity. To understand that number, look at both the profit it earned and the equity left on its balance sheet.
Apple’s equity statement records repurchases and dividends alongside profit. Share compensation and other changes also affect equity. A high ROE can reflect a small equity base as well as strong earnings.
Historical calculation for 2023-10-01–2024-09-28, using the average of equity at 2023-09-30 and 2024-09-28. This is not a current ROE figure.
Apple’s filing figures and the average-equity calculation
Income covers a year, while equity is measured on one date. A common average is (opening equity + closing equity) ÷ 2. Large share issues or repurchases can make a two-date average less representative of capital used during the year.
| Item | Period or date | Amount |
|---|---|---|
| Net income | 2023-10-01–2024-09-28 | 93,736 |
| Opening equity | 2023-09-30 | 62,146 |
| Closing equity | 2024-09-28 | 56,950 |
| Two-date average equity | (62,146 + 56,950) ÷ 2 | 59,548 |
Using average equity gives 93,736 ÷ 59,548 × 100 = 157.41%. Using only closing equity gives 164.59%. The same earnings produce different ratios because the equity basis differs.
Match the owners covered by income and equity. For example, pair income attributable to the parent with equity attributable to the parent in consolidated accounts.
Sources: Apple 2024 Form 10-K, pages 29, 31 and 32 and Apple’s official financial statements. Uses reported GAAP income; only the final percentage is rounded to two decimals, HALF_UP.
Can ROE rise while profit stays unchanged?
Compare doubling profit with halving average equity. Both produce the same ROE.
| Scenario | Net income | Average equity | ROE |
|---|---|---|---|
| Baseline | 100 | 1000 | 10.00% |
| Profit rises only | 200 | 1000 | 20.00% |
| Equity falls only | 100 | 500 | 20.00% |
Both companies reach 20%. One earns more profit; the other divides unchanged profit by less equity. The next question is why equity fell.
Repurchases and dividends can reduce equity. But retained profit, new shares and valuation changes also affect it, so a buyback does not always raise ROE. Its timing matters for average equity too.
Borrowing initially increases cash and liabilities together, leaving equity unchanged. Spending that cash on repurchases can reduce equity. Interest costs or investment losses can also lower profit and ROE.
Change profit and equity to calculate ROE
Leave income unchanged and reduce average equity. Then reset equity and try increasing income.
ROE:
Changing income only (equity fixed at 1,000):
Changing equity only (income fixed at 100):
Amounts are in KRW 100 million. The two separate comparisons change only one input at a time. Do not add their results.
Simulator calculation and rounding
Both languages use KRW 100 million with no currency conversion. Only the final percentage is rounded to two decimals, HALF_UP. Each comparison keeps the other input at its starting value: equity of 1,000 or income of 100. Equity must be positive for a comparable ROE; negative income represents a loss.
Is a high-ROE company always a good company?
| What happened? | What does it tell you? |
|---|---|
| A company keeps more profit from each sale. | That can support lasting profitability. Check whether operating cash flow grows with profit. |
| A company borrows to buy back shares. | Equity can shrink while interest costs rise. Check its borrowings and ability to pay interest. |
| A company sells a building at a gain. | The gain boosts income this year. Check what profit looks like without a sale it may not repeat. |
ROE is undefined when average equity is zero. Negative income divided by negative equity can produce a positive number. Do not rank it alongside a profitable company with positive equity. If either opening or closing equity is nonpositive, or equity turned negative during the period, examine the capital deficit first.
What actually drove the rise in ROE?
Did the company keep more profit from each sale, generate more sales from the same assets, or use more liabilities relative to equity? DuPont analysis separates those three questions.
ROE = net profit margin × total asset turnover × financial leverage
A hypothetical 5% margin × 1 asset turn × 2 times leverage gives 10% ROE. Raising only the margin to 10%, turnover to 2, or leverage to 4 each produces 20%. The result is the same, but only the last change comes from greater leverage.
The three DuPont formulas
The factors are net income ÷ sales, sales ÷ average total assets, and average total assets ÷ average equity. Use matching periods and ownership scope, and the same average assets in both factors. The leverage measure includes liabilities beyond interest-bearing debt.
Source: CFA Institute’s DuPont explanation.
How does ROE relate to P/E and P/B?
Why might investors pay a high P/B? A company that keeps earning more from each unit of equity may attract a higher price relative to book value.
Suppose two companies both trade at a P/E of 20. With closing-equity ROE of 10%, P/B is 2; with ROE of 20%, P/B is 4. The second company earns twice as much relative to its equity, even though its price is also higher relative to book value.
P/B = P/E × ROE as a decimal · 20 × 0.10 = 2
This example uses closing equity for both ROE and P/B. Average-equity ROE will not exactly reproduce a closing-equity P/B. Income definitions, periods and per-share counts must also match.
P/E is market capitalization ÷ net income; P/B is market capitalization ÷ book equity. A high ROE does not by itself justify a high P/B. Compare peers with similar capital needs and consider how much reinvestment growth requires. If expected earnings disappoint, the price can be demanding even with a high ROE. Losses and negative equity do not support a conventional valuation ranking.
Why does SCHD use ROE in stock selection?
A dividend needs both earnings and cash to support it. SCHD’s benchmark, the Dow Jones U.S. Dividend 100 Index, looks at profitability alongside yield.
Its four ranking factors are ROE, free cash flow/total debt, indicated annual dividend yield and five-year dividend growth. ROE helps assess earnings; cash flow relative to debt adds context about the money available to meet obligations. Dividend growth shows how payments have changed. A high ROE alone does not answer all three questions.
The index uses a different ROE definition from the average-equity calculation above. Its screens do not guarantee future dividend growth.
Index selection rules and its ROE definition
The September 2026 S&P Dow Jones Indices methodology, pages 30–31 requires ten consecutive years of dividend payments plus size and trading requirements. This is not ten years of dividend increases. From the higher-yielding half, it combines the four ranks to select 100 stocks, with retention buffers for existing constituents.
Selection ROE is trailing 12-month basic EPS excluding discontinued operations and extraordinary items, divided by the latest quarter’s book value per share (BPS). It does not use average equity. Negative BPS receives the lowest ROE rank.
To see how those rules translate into distributions and performance, compare SCHD with VYM or DGRO with SCHD.
How can you use ROE in investment analysis?
Suppose a company’s ROE jumps this year after staying fairly steady for three to five years. Start with net income. If profit barely changed, look at equity: did repurchases or dividends reduce it, or did losses erode it?
If the company borrowed to fund repurchases, compare its borrowings and interest costs with operating cash flow and cash left after capital spending. Compare its liabilities/equity ratio with industry peers too. A shrinking equity base can lift that ratio as well as ROE.
If profit grew instead, read the notes for an asset-sale gain. If the growth came from the business, compare its margin and asset turnover with peers. That helps you judge whether the higher ROE can last. For the cash actually paid to shareholders, see dividend yield and the payout ratio.
Frequently asked questions
What ROE is good enough?
There is no universal cutoff. Compare industry peers and three to five years of consistent data, then inspect profit growth, equity changes and borrowings.
Why do brokers report different ROE values?
Average versus closing equity, consolidated versus separate accounts, ownership scope, trailing versus forecast income and one-time adjustments can differ. Match definitions and dates first.
Where can I find the inputs for ROE?
Use income statements, balance sheets and equity statements in DART, SEC filings or company IR. Match annual income with opening and closing equity of the same ownership scope, and read notes on capital deficits or large equity changes.