Return on Equity (ROE)

What it is

ROE = net income / shareholders' equity. It tells you how much profit a business produces for every dollar of equity capital tied up in it.

Why it matters

A consistently high ROE — say above 15% — usually points to a durable competitive advantage. Capital is doing real work. A low or volatile ROE often signals a commoditised business or one in trouble.

How Cowry uses it

Cowry pairs ROE with the retention ratio (1 − dividend payout) to estimate sustainable growth: the rate the business can grow earnings without raising new capital. We then project book value forward and discount it back at your cost of equity to estimate intrinsic value.

Watch out for

• Buybacks shrink the equity base, which inflates ROE without improving the business.
• Heavy debt boosts ROE on paper but increases risk. Pair ROE with debt/equity.