In 30 seconds
- ROE divides net income by shareholders' equity: what the company earns for every dollar of its shareholders' money.
- A sustained ROE of 15% over several years is a good sign in industrials and consumer goods; for banks, 14%; for regulated utilities, 8-12%.
- DuPont analysis splits ROE into margin, turnover and leverage: if ROE rises only because of debt, the business deserves no credit.
- Buybacks and negative equity distort ROE, as at Apple, Colgate-Palmolive or McDonald's.
Introduction
Apple earned $112,010 million in net income in fiscal 2025. Its shareholders' equity at year-end added up to $73,733 million. In a single year it earned more than all of its shareholders' money combined: an ROE above 100%. Coca-Cola posted an ROE of 40.7% in 2025. So is Apple several times the better business? No. Understanding why is the difference between using ROE and letting ROE use you.
Explanation
ROE (return on equity) measures how much net income a company generates for every dollar its shareholders have put in. An ROE of 20% means that for every $100 of shareholders' equity, the company earned $20 that year.
Think of an apartment you buy to rent out. You put in $100,000 of your own money and, after expenses, it brings you $6,000 a year. Your return on what you put in is 6%. Now imagine you put in only $30,000 and the bank lends you the rest. If you're left with $3,000 after paying the interest, your return climbs to 10%, even though it's the same apartment. That's exactly what ROE does: it measures what you, the owner, earn on your own money, not how good the apartment is.
Warren Buffett made it a rule in his 1979 letter to shareholders: the primary test of good management is a high return on shareholders' capital, achieved without undue leverage or accounting gimmickry, rather than steady growth in earnings per share. That little caveat, "without undue leverage," is half of this lesson.
How to calculate it
Divide the net income attributable to shareholders, from the income statement, by shareholders' equity, from the balance sheet. Many textbooks use average equity for the year (opening plus closing, divided by two); others use the year-end figure. Both are fine as long as you always compare like with like.
The three levers of ROE
DuPont analysis, which the chemical company of the same name started using about a century ago, splits ROE into three pieces. Net margin: how much profit each dollar of sales leaves behind. Asset turnover: how much in sales you generate for every dollar of assets. Leverage: how many dollars of assets you carry for every dollar of equity. Multiply the three and you have ROE. The first two describe the business. The third describes the debt. When a high ROE comes from the third, dig deeper.
Formula
ROE = Net income / Shareholders' equity
Net income = income attributable to the company's shareholders (income statement)
Shareholders' equity = assets − liabilities (balance sheet), year-end or average for the year
DuPont analysis: ROE = (Net income / Revenue) × (Revenue / Assets) × (Assets / Shareholders' equity)
Example
The table compares the ROE of four consumer staples giants on a trailing-twelve-month basis, as of October 4, 2026. Read it as the dollars of profit each company earned for every $100 of its shareholders' money. Coca-Cola earns 43.0. PepsiCo, 50.4. Procter & Gamble, 29.8. And Colgate-Palmolive, at 631.1%? It isn't twenty times better than P&G. Its equity is tiny after years of buybacks, so the ratio explodes. That's pitfall 1 below, playing out in real time.
Step by step: Coca-Cola, 2025 accounts (10-K, millions of dollars):
1. Net income attributable to shareholders: 13,107.
2. Shareholders' equity at the end of 2025: 32,169.
3. ROE = 13,107 / 32,169 = 40.7%.
Now DuPont, with the same accounts. Net margin: 13,107 divided by 47,941 of revenue = 27.3%. Turnover: 47,941 divided by 104,816 of assets = 0.46 times. Leverage: 104,816 divided by 32,169 = 3.26 times. Multiply: 0.273 × 0.46 × 3.26 = 0.41, the same 40.7%. The reading is clear. Coca-Cola makes a lot on every can (a 27% margin is sky-high in consumer goods), turns its balance sheet over slowly and uses debt in moderation.
Your turn. Procter & Gamble closed fiscal 2026 (June 30, 2026) with net income attributable to shareholders of $16,046 million. Its shareholders' equity at the end of that year: $54,081 million. Work out its ROE.
Before you look: do you think P&G beats Coca-Cola? (You'll land almost exactly on the table's 29.8%, which uses the trailing twelve months: very good, though a long way from Coca-Cola's 40.7% in 2025.)
Real-data example
| Company | Ticker | ROE |
|---|---|---|
| The Coca-Cola Company | KO | 43.0% |
| PepsiCo, Inc. | PEP | 50.4% |
| The Procter & Gamble Company | PG | 29.8% |
| Colgate-Palmolive Company | CL | 631.1% |
How to read it
How to read it
These are rough thresholds, in line with the Summary on Kaplio's stock pages and with the Buffett method, which asks for an ROE of 15% or more on a consistent basis and no year below 10%.
| Sector | Weak | Normal | Good |
|---|---|---|---|
| Industrial or consumer company | below 10% | 10-15% | 15% or more |
| Banks | below 8% | 8-14% | 14% or more |
| Regulated utilities | below 8% | 8-12% | above 12%: check the debt |
A utility lives with a high single-digit ROE because the regulator caps what it can earn. A bank earning 12% can be a better business than a retail chain earning 18%. Always compare within the sector, and look at several years in a row, not one.
Pitfalls and limitations
1. Buybacks shrink the denominator. Apple spent $90,711 million buying back its own shares in fiscal 2025. Every buyback reduces shareholders' equity, and with a small equity base ROE shoots past 100%. Apple is an excellent business, but that percentage says more about its buyback policy than about its iPhones. To compare Apple with other tech companies, use ROIC.
2. Negative equity. McDonald's earned $8,563 million in 2025 and closed the year with shareholders' equity of −$1,791 million, the result of years of buybacks and dividends above earnings. Its ROE comes out negative or infinite, depending on how you calculate it, and it means nothing. When you see an absurd ROE, look at equity first.
3. Debt inflates ROE. Just like the rental apartment, more debt lifts ROE as long as the business earns more than the interest. When it stops doing so, the same lever works in reverse. If DuPont leverage goes from 3 to 6 in a few years, that rising ROE is no credit to management.
4. A one-off gain. Selling a subsidiary can double a year's profit, and ROE with it. Always look at the five- or ten-year record.
Case in point: Coca-Cola, the ROE Buffett saw in 1988
Berkshire Hathaway started buying Coca-Cola in 1988. What Buffett saw is what you've just calculated: a high-margin business that didn't need to borrow to earn more than 15% on its shareholders' money, year after year. Kaplio shows an ROE of 40.7% in 2025 and 43.0% on a trailing-twelve-month basis as of October 4, 2026. Consistency is the signal; a single year's figure is just a snapshot.
Practice on Kaplio
Frequently asked questions
What is a good ROE ratio?
For an industrial or consumer company, 15% or more, held for several years and not propped up by debt, is the usual mark of a good business. Banks have a lower bar, around 14%, and regulated utilities live at 8-12%. The Buffett method asks for 15% or more consistently, with no year below 10%.
What does a 20% ROE mean?
It means the company earned $20 in a year for every $100 of shareholders' equity. For an industrial or consumer business that's a good ROE, above the usual 15% bar. Before you celebrate, check two things: that it repeats over several years, and that it doesn't come from rising debt or equity shrunk by buybacks.
Is 30% return on equity good?
It can be excellent, but check where it comes from. Coca-Cola's 40.7% in 2025 rests mainly on a 27% net margin, not on debt, which makes it solid. A 30% ROE driven by heavy leverage, buybacks or a one-off gain is far less reliable. And one year proves little: look for consistency.
What does ROE tell you?
It tells you how much net income a company earns on the money its shareholders have put in. It doesn't tell you, on its own, how good the underlying business is: debt, buybacks and one-off gains can all lift it. That's why you pair it with DuPont analysis, and with ROIC when debt is high or equity shrinks.