Return on Equity (ROE)
Return on Equity (ROE) measures how much net profit a company generates per dollar of shareholders' equity. It reflects management's ability to generate returns for equity owners, making it a widely used quality metric in stock valuation.
Formula
Example
A company with $200M net income and $1B in equity has an ROE of 20%. Warren Buffett typically targets companies with ROE above 15% as part of his quality-focused stock valuation approach.
Why It Matters
ROE is a key signal in stock valuation: sustained high ROE indicates a business with competitive advantages. However, it can be inflated by leverage. Comparing ROE to ROIC helps separate genuine quality from financial engineering.
How MiniValuator Uses Return on Equity (ROE)
MiniValuator reads ROE as a core measure of business quality. Sustained high ROE is one of the signals that separates a durable franchise from an average business, and for banks and other financial companies it is a primary input rather than a sidecar to a cash-flow model.
See It in Action
- How the PE model estimates fair value
- Technology sector fair value analysis
- Healthcare sector fair value analysis
Related Terms
- Return on Invested Capital (ROIC) — ROIC measures how efficiently a company generates profit from its total invested capital (equity + d...
- Discounted Cash Flow (DCF) — Discounted Cash Flow (DCF) is a fundamental stock valuation methodology that estimates the present v...
- Intrinsic Value — Intrinsic value is the estimated true worth of an asset based on its fundamental economic characteri...
- Free Cash Flow (FCF) — Free Cash Flow (FCF) is the cash a company generates from its core business operations after funding...
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