Return on equity is one of the most quoted quality metrics in investing — and one of the most misread. It tells you how efficiently a company turns shareholders' money into profit. A consistently high ROE is a hallmark of a great business. But a high ROE can also be an illusion created by debt, so the number alone is never the whole answer.
What ROE actually measures
ROE is net profit divided by shareholders' equity. If a company earns ₹20 of profit on ₹100 of equity, its ROE is 20%. The higher it is, the more profit the business squeezes from each rupee owners have put in — and the faster it can compound without raising fresh capital.
So what is a “good” ROE?
As a rough guide for Indian stocks:
- Below 10% — weak; the business isn't earning much on its capital.
- 10–15% — average and acceptable for many sectors.
- 15–20% — strong; typical of good, well-run companies.
- Consistently above 20% — excellent, the territory of true compounders — if it isn't driven by heavy debt.
The word that matters most is consistently. A single high-ROE year can be a fluke; a decade of 18%+ ROE is a business doing something genuinely well.
The leverage trap
Here is the catch. Because ROE divides by equity, a company can boost its ROE simply by taking on more debt — more debt shrinks the equity base and inflates the ratio, without the business actually becoming better. A 25% ROE propped up by a mountain of borrowings is far riskier than a 18% ROE with almost no debt.
Always read ROE next to debt-to-equity. High ROE + low debt is quality. High ROE + high debt is a flag, not a feature.
ROE vs ROCE
To cut through the leverage effect, pair ROE with ROCE (return on capital employed), which measures returns on all capital — debt and equity together. When ROCE is close to ROE, the returns are real. When ROE is much higher than ROCE, debt is doing the heavy lifting.
Put it in portfolio context
ROE is one input into a stock's quality, alongside revenue growth, margins, and cash flow. Judged together and tracked every quarter, they tell you whether a holding is a genuine compounder — the same approach in our guide on analyzing your portfolio.