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A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how effectively management generates profits from equity capital.
ROE tells you how much profit a company generates with the money shareholders have invested. An ROE of 15% means the company generates $0.15 of net income for every $1 of equity. Companies with consistently high ROE (above 15-20%) are often excellent businesses with durable competitive advantages. Warren Buffett has cited ROE as one of his favorite metrics for identifying quality companies. However, ROE can be artificially inflated by high leverage (more debt means less equity in the denominator), so it should always be analyzed alongside the debt-to-equity ratio. The DuPont analysis breaks ROE into three components: profit margin, asset turnover, and financial leverage.