Formula
ROE = net income ÷ equity × 100 (%)
Equity is what remains for shareholders after liabilities are subtracted from total assets. With net income of KRW 15 billion and equity of KRW 100 billion, ROE is 15%.
Definition
ROE (return on equity) is net income divided by equity, showing as a percentage how much profit the company made by putting shareholders' money to work. An ROE of 15% means the company earned KRW 15 of net income in a year for every KRW 100 of shareholder capital.
ROE compresses the question of whether the company uses its capital efficiently into a single number. Set against bank deposit rates or the expected returns of other investments, it gauges whether the company is putting shareholders' money to better use than those alternatives. It is known as one of the metrics value investors have weighed most heavily over the years.
At Jupick, ROE is the core metric of the profitability area. Profitability carries the largest weight in the overall grade, 40%, and within it Jupick reads ROE, operating margin and revenue growth together. A company that consistently earns high profits on its own capital is read as having a business with a solid competitive position.
How to read it
In general, a higher ROE is read as using capital well to generate profit. In Jupick's strengths and weaknesses summary, an ROE of 15% or more is generally labeled “High profit relative to equity” and below 5% “Low profit relative to equity”.
ROE depends heavily on a sector's capital structure, though. Heavy industry, with large capital spending, tends to show low ROE, while service and platform businesses that need little capital tend to show high ROE. Comparisons within the same sector are the most accurate.
Because ROE can also rise when debt increases, it needs to be read with stability metrics such as the debt ratio and interest coverage to tell profit earned by using debt well from profit squeezed out by taking on risk.
ROE across the market now
The values that fall at each point when the stocks Jupick covers are lined up by ROE, smallest to largest. Positions in the line are used instead of an average because a few unusually large values can drag a single average a long way.
KoreaBased on 198 stocks
| Lowest 25% | Middle | Highest 25% |
|---|---|---|
| 3.3% | 7.5% | 13.2% |
Smallest value -385.1%, largest value 65.0%
Of the major Korean stocks, only 198 made it into this table. Left out: 2 stocks whose value is not a measured one.
OverseasBased on 181 stocks
| Lowest 25% | Middle | Highest 25% |
|---|---|---|
| 12.6% | 18.4% | 41.4% |
Smallest value -20.7%, largest value 267.4%
Of the major overseas stocks, only 181 made it into this table. Left out: 18 stocks whose value is not a measured one.
Stocks are rarely left out at random. Companies for which a metric does not hold, or for which the source gives no value, tend to be the ones in weaker shape, so the stocks left in the table are the ones in better condition. The middle value of such a table leans to the favorable side compared with the whole market, and the more stocks are left out, the more it leans.
How to read each range
- Lowest 25%
- The bottom quarter for profit generated on shareholder capital. Sectors with heavy capital spending land here for structural reasons, and companies whose profit fell sharply that year come down here too. Any negative values are included in this band.
- Middle half
- Earning power relative to capital is in the common range for the market. Whether the company has held this band over several years says more about the strength of the business than one year of being here.
- Highest 25%
- The top quarter for earning power relative to capital. Because the value also grows when equity is small, companies whose high debt ratio has thinned the denominator mix in here. This band is best read after checking the stability metrics.
The two values at either end of the table above are the boundaries that split the stocks into three groups. What it means to belong to each group is written above.
Two stocks that fall just either side of a boundary have practically the same value. Being in different groups does not by itself make them different. The boundaries are drawn again from each day’s sample, so a company can change groups even when nothing about it has changed.
Lowest and highest describe the order of size only, not good or bad. The data is updated once a day.
Stocks with a high ROE now
- 1BColgate-Palmolive Company267.4%
- 2BMastercard Incorporated241.2%
- 3BApple Inc.148.8%
- 4BSimon Property Group, Inc.120.5%
- 5SNVIDIA Corporation117.2%
Stocks on Jupick's watchlist with a positive ROE, sorted from the highest.
Points to watch
- ROE can look high even with a lot of debt. When the denominator, equity, is small, the same profit produces a larger ROE, so a high ROE at a heavily indebted company may be a number built by taking on that much risk.
- When share repurchases reduce equity, ROE rises artificially. This needs to be kept apart from a real improvement in the business.
- When net income spikes from one-off gains or a swing into losses, ROE is distorted along with it. Looking at the trend over several years is safer than looking at a single year.
- For companies with negative equity (capital impairment), ROE loses its meaning.