Return on Equity (ROE) measures how much profit a company generates for each
dollar of shareholders' equity. It is the most widely used measure of
management's efficiency in generating returns on capital.
ROE = Net Income ÷ Shareholders' Equity × 100
A 20% ROE means the company generates $0.20 in profit for every $1.00 of
equity capital — equivalent to a 20% annual return for equity investors if
all profits are retained and reinvested.
What Is a Good ROE?
ROE Range
Interpretation
20%+
Excellent — top-quartile performance
15–20%
Good — above average for most industries
10–15%
Acceptable — in line with market average
5–10%
Below average — needs improvement
Under 5%
Poor — may be destroying equity value
The long-run average ROE for the S&P 500 is approximately 14%. Technology
companies often achieve 20–40%; retailers 10–15%; utilities 8–12%.
Equity Multiplier = Total Assets ÷ Equity (financial leverage)
High ROE from high margins and asset efficiency is more sustainable than
high ROE driven purely by leverage. Over-leveraged ROE collapses quickly
when business conditions deteriorate.
ROE and Sustainable Growth Rate
The sustainable growth rate is the maximum rate at which a company can grow
without external equity financing:
Sustainable Growth Rate = ROE × (1 − Dividend Payout Ratio (the % of earnings paid out to shareholders instead of retained))
At 20% ROE with 0% payout (all earnings retained): 20% sustainable growth.
At 20% ROE with 50% payout: 10% sustainable growth.
Frequently asked questions
How does ROE differ from ROA?
Return on Assets (ROA) = Net Income ÷ Total Assets. ROA measures efficiency
across all capital (debt + equity). ROE only measures returns on equity capital.
The difference between ROE and ROA reflects financial leverage: ROE = ROA ×
Equity Multiplier. A company with the same ROA but more debt will show a
higher ROE — which can be misleading if leverage is excessive.
When is a high ROE misleading?
A very high ROE can result from: (1) high financial leverage inflating returns,
(2) share buybacks reducing equity to near zero, or (3) large accumulated
losses reducing book equity. Always check whether high ROE is driven by
margin and asset efficiency (good) or financial engineering (risky).
Company A (software) and Company B (retail) have the same ROE but very
different risk profiles. Company A's ROE is more sustainable because it
comes from margin; Company B relies on both asset efficiency and leverage.
How to Improve Each Driver
Improving Net Profit Margin
Raise prices on high-demand products
Cut COGS through supplier negotiation or product redesign
Return on Equity Benchmarks by Industry (2024–2025)
Industry-average ROE benchmarks for tech, SaaS, manufacturing, retail, finance, and healthcare — with context on why they differ.
Why ROE Varies by Industry
ROE is shaped by capital intensity, business model, and competitive dynamics.
Asset-light businesses (software, financial services) naturally produce higher
ROE. Capital-intensive businesses (manufacturing, utilities) have structurally
lower ROE — but that doesn't mean they are destroying value if their cost of
equity is also lower.
ROE Benchmarks by Industry (2024–2025)
Industry
Median ROE
Notes
Software / SaaS
18–35%
Asset-light, high margins
Financial services
10–18%
Leverage-driven ROE
Healthcare / Pharma
12–22%
IP-driven margins
Consumer goods
15–25%
Brand moat + volume
Technology hardware
15–25%
Mix of margin and turnover
Retail
10–20%
Thin margins, high turnover
Manufacturing
8–15%
Capital-intensive
Real estate
5–12%
Asset-heavy
Utilities
8–12%
Regulated, stable
Early-stage startups
Negative to N/A
Pre-profit
How to Use Industry Benchmarks
A 12% ROE for a software company is underperforming; a 12% ROE for a utility
is strong. Always contextualize against:
Your industry median ROE
Your cost of equity (CAPM-based estimate)
Historical ROE trend (improving or declining?)
Competitor ROE (are you above or below peers?)
A company with ROE > cost of equity is creating value. ROE < cost of equity
destroys shareholder value even if the business is nominally "profitable."
Sustainable Growth Rate: How ROE Determines How Fast You Can Grow
How Return on Equity and dividend payout ratio determine your sustainable growth rate — the maximum growth without external equity financing.
What Is the Sustainable Growth Rate?
The sustainable growth rate (SGR) is the maximum rate at which a company can
grow revenue using only retained earnings — without diluting equity through
new share issuance.
SGR = ROE × (1 − Dividend Payout Ratio)
For companies that pay no dividends (payout ratio = 0%):
SGR = ROE
Why SGR Matters
Growing faster than your SGR requires external financing — either debt or
new equity. This has practical implications:
Growth = SGR: Self-funding growth, no dilution, sustainable indefinitely
Growth > SGR: Must raise capital externally or it strains cash flow
Most high-growth startups have negative ROE (operating at a loss) and need
external capital regardless. SGR becomes strategically important once a
company reaches profitability:
A bootstrapped SaaS company at 20% ROE can self-fund 20% annual growth
To grow faster (50–100%+), they need outside capital
The decision point: is external capital worth the dilution and complexity?
For bootstrapped founders, maximizing ROE is equivalent to maximizing
self-fundable growth rate.
Tools our audience uses alongside this calculator.
VisibleInvestor Reporting
Visible helps founders track financial metrics including ROE, ROA, and DuPont components in investor-ready dashboards — connect your accounting software and automate reporting.
Pry is a financial modeling and reporting platform that tracks ROE, cash flow, and headcount metrics automatically — built for startups and growth-stage companies.