Return on Equity (ROE)
Net income divided by shareholders' equity, how productively a business uses its own capital.
`ROE = Net income / Shareholders' equity`. DuPont decomposition breaks it into three drivers: `ROE = Net margin × Asset turnover × Equity multiplier (leverage)`.
Why it matters. Sustained ROE above 15–20% is one of the strongest quantitative signatures of a durable competitive advantage. High ROE plus low leverage typically indicates genuine pricing power; high ROE driven by leverage is a different story.
Pitfalls. Buybacks mechanically shrink equity and lift ROE without improving the operating business. Equity made small by past write-offs can distort the ratio. Cross-check ROE against ROIC (which isn't distorted by capital structure) for a cleaner signal.
See it applied
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