
Return on Equity: What it is & Why it Matters for Growth Stocks
Nick Schmidt
Nick Schmidt is a co-founder of TraderLion and Deepvue with over 10 years of market experience. Adopting a “less is more” philosophy, he focuses on weekly charts with an emphasis on price and volume.
November 25, 2023
What is Return on Equity (ROE)?
Return on Equity (ROE) is a key measure of how effectively a company uses its shareholders’ money to generate profits. It shows how much profit a company makes for every dollar of equity financing. To calculate ROE, you divide the company’s net income by its shareholders’ equity and express the result as a percentage. This metric helps see how well a company is using its equity to make money.
A positive ROE suggests that the company is good at generating returns for its shareholders. To get a better sense of a company’s performance, it’s helpful to compare its ROE with others in the same industry.
How is Return on Equity Calculated?

The formula for ROE is simple. Here’s how you calculate it:
- Find the net income on the company’s income statement.
- Look up shareholders’ equity on the balance sheet.
- Divide net income by shareholders’ equity.
- Multiply by 100 to get the percentage.
Pro Tip: ROE can give you insights into a company’s profitability and efficiency. But for a fair comparison, check the ROE of companies within the same industry. Another helpful metric to consider is Operating Income, which digs deeper into the company’s financial health.
The Role of Return on Equity in CAN SLIM:
William O’Neil uses return on equity (ROE) as a key metric for assessing how well a company turns its resources into profits. Within the CAN SLIM framework, ROE directly supports the “A” in CAN SLIM, which stands for Annual Earnings Increases. O’Neil highlights ROE as a way to gauge management’s effectiveness, helping investors identify companies that deliver strong returns on investment from those that fall short.
In How to Make Money in Stocks, O’Neil’s research found that many of the top growth stocks have ROEs of at least 17%. The best-performing stocks often hit 25% or more, sometimes even reaching 50% during their peak growth phases. This high ROE aligns with CAN SLIM’s focus on annual earnings increases—companies with strong ROEs usually show steady profitability, which tends to drive their stock performance.
For investors, a high ROE can indicate that the company is:
ROE Checklist
Investors using the CAN SLIM method, and focusing on ROE specifically, can more easily spot stocks with high growth potential and efficient operations. ROE acts as a quality check on a company’s annual earnings growth and overall profitability, supporting the CAN SLIM approach’s ability to uncover top-performing stocks. In short, ROE isn’t just a number—it’s a window into a company’s financial health and operational efficiency.
Here are some ROE guidelines inspired by O’Neil’s CAN SLIM strategy for identifying the strongest stocks:
What Factors Can Affect Return on Equity?
Several factors can influence a company’s ROE, such as profitability, debt levels, and industry performance. Let’s break these down:
What are Some Limitations of Return on Equity?
While ROE is a useful metric, it has some limitations that investors should keep in mind:
Because of these limitations, it’s wise to look at other metrics too, like the P/E ratio, to get a fuller picture of a company’s performance.
How Can Companies Improve Their Return on Equity?
To improve ROE, companies can:
Take Apple, for instance. In the 1990s, Apple’s ROE was low due to financial challenges. But under Steve Jobs, they focused on innovation, expanded their product line, and boosted profitability. This strategy led to a high ROE, eventually making Apple one of the world’s most valuable companies.
What is the Difference Between Return on Equity and Return on Investment?
Both ROE and Return on Investment (ROI) are useful fundamental metrics, but they measure different things. ROE focuses on how profitably a company uses its shareholders’ equity, while ROI looks at the total profitability of any given investment. ROE is calculated by dividing net income by shareholders’ equity, whereas ROI divides net revenue or gross income by the total investment cost. So, ROE is more about a company’s capital efficiency, while ROI gives a broader view of an investment’s overall performance.
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