{"id":264,"date":"2025-07-05T07:56:08","date_gmt":"2025-07-05T07:56:08","guid":{"rendered":"https:\/\/cardinals.highflags.com\/?p=264"},"modified":"2025-07-05T07:58:03","modified_gmt":"2025-07-05T07:58:03","slug":"what-is-roe-explain-in-laymans-language-what-should-be-the-ideal-roe-for-a-good-company-to-invest-in","status":"publish","type":"post","link":"https:\/\/cardinals.highflags.com\/index.php\/2025\/07\/05\/what-is-roe-explain-in-laymans-language-what-should-be-the-ideal-roe-for-a-good-company-to-invest-in\/","title":{"rendered":"What is ROE ?Explain in layman&#8217;s language, What should be the ideal ROE for a good company to invest in?"},"content":{"rendered":"\n<p><strong>ROE stands for Return on Equity.<br>It tells you:<\/strong><\/p>\n\n\n\n<p><strong>&#8220;How much profit a company makes using the money invested by its shareholders.&#8221;<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\ud83e\udde0 Imagine This:<\/strong><\/p>\n\n\n\n<p><strong>Let\u2019s say you and some friends invest <\/strong><strong>\u20b9<\/strong><strong>10 lakh to start a small business (your equity).<br>At the end of the year, you earn a profit of <\/strong><strong>\u20b9<\/strong><strong>1.5 lakh.<\/strong><\/p>\n\n\n\n<p><strong>Then:<\/strong><\/p>\n\n\n\n<p><strong>ROE=Profit\/Equity=\u20b91.5\u00a0lakh\/\u20b910\u00a0lakh=15% <\/strong><\/p>\n\n\n\n<p><strong>This means:<br>\ud83d\udc49 You earned 15% return on your own money in one year.<br>A higher ROE = better use of your money.<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\ud83d\udca1 ROE Formula:<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"302\" height=\"50\" src=\"https:\/\/cardinals.highflags.com\/wp-content\/uploads\/2025\/07\/image.png\" alt=\"\" class=\"wp-image-265\" srcset=\"https:\/\/cardinals.highflags.com\/wp-content\/uploads\/2025\/07\/image.png 302w, https:\/\/cardinals.highflags.com\/wp-content\/uploads\/2025\/07\/image-300x50.png 300w\" sizes=\"(max-width: 302px) 100vw, 302px\" \/><\/figure>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Net Profit = Company\u2019s income after all expenses and tax<\/strong><\/li>\n\n\n\n<li><strong>Shareholders&#8217; Equity = The total money invested by the owners + profits kept in the business<\/strong><\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\ud83d\udecd\ufe0f Example with a Company:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>A company has <\/strong><strong>\u20b9<\/strong><strong>500 crore equity (from shareholders)<\/strong><\/li>\n\n\n\n<li><strong>It earns <\/strong><strong>\u20b9<\/strong><strong>75 crore profit this year<\/strong><\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"216\" height=\"49\" src=\"https:\/\/cardinals.highflags.com\/wp-content\/uploads\/2025\/07\/image-1.png\" alt=\"\" class=\"wp-image-267\"\/><\/figure>\n\n\n\n<p><strong>So, for every <\/strong><strong>\u20b9<\/strong><strong>1 invested by owners, the company made <\/strong><strong>\u20b9<\/strong><strong>0.15 profit.<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\u2705 What is an Ideal ROE for Investment?<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><td><strong>ROE<\/strong><\/td><td><strong>Meaning<\/strong><\/td><td><strong>Good or Bad?<\/strong><\/td><\/tr><\/thead><tbody><tr><td><strong>&gt; 20%<\/strong><\/td><td><strong>Excellent<\/strong><\/td><td><strong>Company uses capital very efficiently<\/strong><\/td><\/tr><tr><td><strong>15% \u2013 20%<\/strong><\/td><td><strong>Very Good<\/strong><\/td><td><strong>Strong performer, likely consistent<\/strong><\/td><\/tr><tr><td><strong>10% \u2013 15%<\/strong><\/td><td><strong>Decent<\/strong><\/td><td><strong>Acceptable if other factors are solid<\/strong><\/td><\/tr><tr><td><strong>&lt; 10%<\/strong><\/td><td><strong>Weak<\/strong><\/td><td><strong>Company may be inefficient or struggling<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\ud83e\uddfe Ideal ROE by Sector:<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><td><strong>Sector<\/strong><\/td><td><strong>Ideal ROE<\/strong><\/td><\/tr><\/thead><tbody><tr><td><strong>Banks \/ Insurance<\/strong><\/td><td><strong>12% \u2013 18%<\/strong><\/td><\/tr><tr><td><strong>Consumer Goods \/ FMCG<\/strong><\/td><td><strong>15% \u2013 25%<\/strong><\/td><\/tr><tr><td><strong>Tech \/ Pharma<\/strong><\/td><td><strong>15% \u2013 30%<\/strong><\/td><\/tr><tr><td><strong>Capital-Heavy Industries (Power, Infra)<\/strong><\/td><td><strong>8% \u2013 12%<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\u26a0\ufe0f But Be Careful:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Very high ROE (>30%) could be due to low equity (high debt), which adds risk.<\/strong><\/li>\n\n\n\n<li><strong>Always check debt levels with ROE.<\/strong><\/li>\n\n\n\n<li><strong>ROE should be consistent over years, not just once.<\/strong><\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><strong>\ud83c\udfaf Final Summary (Like Talking to a Friend):<\/strong><\/p>\n\n\n\n<p><strong>ROE shows how well a company uses its own money to make profit.<br>A good company usually has ROE between 15% to 20% or more.<br>It&#8217;s like saying:<br><em>\u201cFor every <\/em><\/strong><strong><em>\u20b9<\/em><\/strong><strong><em>1 the company owns, how much <\/em><\/strong><strong><em>\u20b9<\/em><\/strong><strong><em> it earns back?\u201d<\/em><\/strong><strong><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>ROE stands for Return on Equity.It tells you: &#8220;How much profit a company makes using the money invested by its shareholders.&#8221; \ud83e\udde0 Imagine This: Let\u2019s say you and some friends invest \u20b910 lakh to start a small business (your equity).At the end of the year, you earn a profit of \u20b91.5 lakh. Then: ROE=Profit\/Equity=\u20b91.5\u00a0lakh\/\u20b910\u00a0lakh=15% This&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_eb_attr":"","_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[1],"tags":[],"class_list":["post-264","post","type-post","status-publish","format-standard","hentry","category-blog"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is ROE ?Explain in layman&#039;s language, What should be the ideal ROE for a good company to invest in? - cardinals<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/cardinals.highflags.com\/index.php\/2025\/07\/05\/what-is-roe-explain-in-laymans-language-what-should-be-the-ideal-roe-for-a-good-company-to-invest-in\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is ROE ?Explain in layman&#039;s language, What should be the ideal ROE for a good company to invest in? - cardinals\" \/>\n<meta property=\"og:description\" content=\"ROE stands for Return on Equity.It tells you: &#8220;How much profit a company makes using the money invested by its shareholders.&#8221; \ud83e\udde0 Imagine This: Let\u2019s say you and some friends invest \u20b910 lakh to start a small business (your equity).At the end of the year, you earn a profit of \u20b91.5 lakh. 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