Return on equity (ROE), explained
Return on equity tells you how good a company is at turning its owners’ money into profit. It’s one of Buffett’s favourite quality checks — here’s how it works, and the one trap to watch for.
What it measures
Return on equity shows how efficiently a company turns its shareholders' money into profit. It's one of Warren Buffett's favourite quality checks, because a business that consistently earns a high return on the equity invested in it is usually doing something right.
The formula
Worked example
A company earns £50m in net profit on £250m of shareholders' equity:
For every £1 of equity, the company generated 20p of profit in the year. That's a strong, quality-business level of return.
What's a good ROE?
As a rough guide, a sustained ROE of 15% or more is considered strong, and consistency matters more than a single high year. A business that earns 18–20% year after year is compounding shareholder value far faster than one bouncing between 5% and 25%.
The debt caveat (important)
ROE has a trap: it can be inflated by debt. Equity is what's left after liabilities, so a heavily borrowed company has a smaller equity base — which mechanically lifts ROE even if the underlying business isn't better. A sky-high ROE alongside a high debt-to-equity ratio is a warning, not a triumph. Always read the two together.
Quality signal: the businesses Buffett prizes tend to show durably high ROE without heavy debt — proof of a real competitive advantage rather than financial engineering.
Oak Growth checks ROE as part of the Financials pillar in its 4-pillar screen.
Put this into practice — open the screener →