Technical definition
A profitability ratio measuring profit earned relative to average owners' equity.
How it works
ROE commonly equals net income divided by average equity. It reflects operating performance, asset efficiency and financial leverage, so changes should be decomposed rather than judged in isolation.
Everyday example
Net income of $15,000 and average equity of $75,000 produce ROE of 20%.
Common pitfall
Debt can raise ROE by reducing the equity base while also increasing financial risk.