Return on equity measures a specific thing — how efficiently a company turns shareholder capital into profit — and the "good" benchmark varies more by industry than most simplified rules of thumb suggest.
The Formula and Industry Variation
ROE = net income ÷ shareholder equity. As a general benchmark, 15-20% is considered strong, and 20%+ is considered good, with 30%+ exceptional — but industry norms vary sharply: utilities are typically capped near 11-14% by rate regulation, while franchised restaurant chains regularly post 40-55% ROE on minimal equity bases. A bank posting 13% ROE is performing normally; a software company posting the same 13% is real-world underperforming its typical peers.
The detail that matters here: A unusually high ROE can be produced by heavy debt (which shrinks the equity denominator) rather than efficient operations — always cross-check ROE against a company's debt-to-equity ratio before concluding the high number reflects operational excellence rather than financial leverage.
Someone Comparing ROE Across Different Sectors: Compare against the industry median instead of a single universal number — sector capital structures differ too much for one benchmark to apply everywhere.
Someone Seeing an Unusually High ROE: Check the debt-to-equity ratio — high leverage, not operational efficiency, is a common driver of outlier ROE figures.
Use ROE the Way
- Compare ROE against the industry median, not a universal number.
- Check debt-to-equity alongside ROE to rule out leverage-driven inflation.
- Track ROE's trend over several years, not one snapshot.
See ROA explained, which controls for the leverage effect ROE doesn't.
