Below 10% - weak
Capital isn't working hard. Common in capital-intensive or low-margin businesses; rarely a compounder.
Benchmark
What is a good ROE?
A good return on equity is generally 15% or higher sustained over several years - but only after you check what drives it. ROE that comes from real operating quality is excellent; ROE manufactured with heavy debt is fragile. Use a DuPont breakdown to separate profit margin, asset turnover, and leverage. Roughly 15-20% from modest leverage is strong; below about 10% is weak.
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Short answer
15%+ is the rule of thumb, but always ask where the ROE comes from. A 25% ROE built on a mountain of debt is far weaker than an 18% ROE from fat margins and efficient assets. ROIC, which ignores leverage, is the honest cross-check.
What counts as a good ROE, by range
10-15% - decent
Solid, provided leverage is moderate. A respectable but not exceptional use of shareholder capital.
15-20% - strong
The quality zone - as long as debt isn't doing the heavy lifting. Verify with a DuPont breakdown.
Above 20% - excellent or leveraged
Elite if it's debt-light and durable; a warning if it's manufactured with leverage or buybacks.
Why you must look under the hood
Two companies both report 20 percent ROE. Company A: 10 percent net margin, decent asset turnover, almost no debt. Company B: thin margins, but it borrowed heavily so equity is tiny - leverage alone lifts the ratio to 20 percent.
DuPont analysis splits ROE into margin x turnover x leverage and exposes the difference instantly. Company A's return is durable; Company B's evaporates the moment earnings dip or rates rise. This is exactly why quality investors anchor on ROIC, which strips leverage out.
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Related
- What is ROE? - the full definition and why leverage can flatter it.
- What is DuPont analysis? - ROE decomposed into margin, turnover, and leverage - where returns really come from.
- What is ROIC? - the leverage-neutral quality gauge to cross-check ROE against.
- What is the debt-to-equity ratio? - the first check on how much leverage is propping up a high ROE.
See ROE and ROIC side by side
invest-like reports ROE next to ROIC and a leverage check on every stock, so a debt-fueled ROE can't masquerade as quality.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.