What Is ROE? Return on Equity Explained Simply

ROE stands for return on equity. It measures how much profit a company generates for every dollar shareholders have invested in it.

Think of it like this: if you and your friends put money into a small business, ROE tells you how well that money is being put to work.

A higher ROE generally means a company is more efficient at turning shareholder money into profit. It's often used to compare companies within the same industry.

Here's the part people miss. A company can pump up its ROE by taking on a lot of debt, not just by being more profitable. Debt reduces the amount of shareholder equity in the equation, which can make ROE look impressive even if the business isn't actually performing better.

So a high ROE is worth a second look. Check the company's debt levels alongside it, so you know whether that strong number is coming from real performance or just financial leverage.