Return on equity

Return on equity (ROE) shows how effectively the company generates profits in relation to the capital invested by its owners. It is one of the most commonly used key figures for assessing whether the company creates real value for its owners and whether it is run efficiently, both operationally and financially.

What does return on equity show?

ROE expresses how much the company earns for every dollar that the owners have invested in the company.
If a company has an ROE of 15%, this means that every $100 in equity generates $15 in profit after tax.

This makes the key figure particularly important for:

• investors who assess return potential
• lenders who want to see efficient operations
• partners who assess financial stability

A high ROE is often positive, but it can also mask high debt levels, which increase risk if earnings fall.

How is return on equity calculated?

The most commonly used formula is: Return on equity = (Profit for the year × 100) / Equity

The result for the year shows a profit after tax, while equity consists of paid-in capital and retained earnings.

Example:
Profit for the year: DKK 750,000.
Equity: DKK 5,000,000.
ROE = 15%

This shows that the company is generating a return of 15% on the owners' capital.

When is ROE satisfactory?

It depends on the industry, risk level, and market conditions.

• In capital-intensive industries (e.g., manufacturing, transportation), 8–10% may be reasonable.
• In consulting and service industries , 15–25% is often expected .

As a starting point, ROE should exceed the market interest rate – otherwise, owners could achieve better returns in safer investments such as bonds.

However, a very high ROE can be a warning sign if it is due to low equity and high debt.

What affects the return on equity?

Several factors influence ROE:

• company's profit level
• return on assets (efficiency of asset utilization)
• debt ratio and interest rate level
• one-off items or significant fluctuations in earnings

Therefore, ROE should always be analyzed together with key figures such as solvency ratio, return on assets, profit before tax, and liquidity ratio.

Advantages and limitations of ROE

Advantages:

• easy to understand and explain
• good for comparing companies
• directly linked to the owners' return

Limitations:

• may appear artificially high when equity is low
• affected by non-recurring items and accounting technicalities
• does not say anything about the company's risk

Therefore, ROE is best used as part of an overall financial assessment.

Return on equity in Qatchr

In Qatchr, our credit platform, return on equity is calculated automatically based on the company's latest financial statements. When you make a credit search, ROE is presented along with other key figures that provide an overall picture of the company's financial strength.

Credit monitoring makes it possible to track developments over time and respond if returns fall—often an early sign of financial challenges.

FAQ

What is return on equity?
A key figure that shows how much return the company generates in relation to its equity.

What is a good ROE?
Typically 10–25%, depending on the industry and risk level.

Can ROE be too high?
Yes – especially if the company has very little equity and high debt.

How can ROE be improved?
Through higher earnings, better cost management, or a healthy capital structure.