What is return on equity, and what counts as a good ROE?

Return on equity (ROE) is net income divided by owners' equity: the profit a business earned in a year for each dollar its owners have in it. A good ROE beats your industry's and holds up for several years. Across US public companies taken together it was 17.21% in January 2026, with trucking at 7.60% and software at 29.62%.

Year-end numbers are in, and you have a choice to make: reinvest the profit, take it out as a distribution, or pay down the line of credit. Or a partner asks what the business really earns on the money you've all put into it. Both come down to how hard the money you've left in the business is working.

How do you calculate return on equity?

Divide the year's net income by owners' equity. Equity is what the balance sheet shows after liabilities are subtracted from assets; the SEC's guide to financial statements calls it "the money that would be left if a company sold all of its assets and paid off all of its liabilities."

Analysts differ on which equity figure to use. Aswath Damodaran of NYU's Stern School of Business uses equity at the start of the year, because that is the money that earned the year's profit. The FDIC's definition for banks uses average equity over the period. Either works if you use the same one every year.

The figures are an illustration. The business earned 18 cents for every dollar of equity it started the year with.

What is a good return on equity?

A good return on equity is higher than your industry's and steady from year to year. One free benchmark is Damodaran's dataset of US public companies, updated in January 2026.

Treat these as a range, since they come from public companies measured on their books. Two adjustments make your own figure comparable. If your company is an S corporation or an LLC taxed as a partnership, the income tax is generally paid by the owners rather than the company (IRS), so your ROE is before that tax and will look higher than a taxpaying corporation's. And if you pay yourself less than it would cost to hire someone for your role, count the difference as an expense before you compare.

Your own trend tells you more than any table. Damodaran's paper compares ROE with the cost of equity, the return owners need for the risk they carry. An ROE that clears that bar year after year says more than one strong year.

Why can a high return on equity mislead?

A high ROE can come from thin equity rather than strong profit. Three things move the ratio without making the business better.

Debt raises ROE when the business earns more on its capital than the debt costs after tax, and lowers it when it earns less. Damodaran writes it as ROE = return on capital + debt/equity × (return on capital − after-tax cost of debt), where return on capital is after-tax operating income divided by the debt and equity invested in the business, net of cash. The higher ROE comes with fixed payments, which the gap between levered and unlevered free cash flow shows.

Distributions lower equity, so ROE rises even when profit does not. In Damodaran's example, a company earning $10 million on $100 million of equity pays out $20 million of cash that had earned $1 million after tax, and its ROE goes from 10% to 11.25%.

One-time gains, such as the sale of equipment, lift net income for a single year. Take them out before you compare years.

When equity is negative, after years of losses or of distributions larger than profits, ROE becomes "a meaningless number," in Damodaran's words, and return on capital is the better measure. ROE also says little in a company's first years, when equity is small and profit swings.

What does ROE tell you about the choices in front of you?

It shows which lever moves your return: profit, the capital the business ties up, or debt.

• Reinvesting profit adds to equity, so ROE holds only if the new money earns as much as the old.
• A distribution raises ROE on paper and leaves less cash in the business.
• Paying down debt lowers ROE when the business earns more on its capital than the loan costs after tax, and it also lowers your fixed payments.

None of these choices is right on ROE alone. Put the ratio next to your cash forecast and the KPIs you already track before you decide.

What to do next

1. Calculate ROE for each of the last three to five years from your year-end statements, with the same equity figure each time.
2. Restate net income with a market salary for your own role and without one-time gains, then calculate it again.
3. Calculate return on capital for the same years, so you can see how much of your ROE comes from debt.
4. Before a distribution, a loan payoff, or a large reinvestment, run the numbers both ways and compare the ROE and the cash left afterward.

We help you build these measures into a monthly KPI dashboard and test what each choice does to them before you make it. That is part of our FP&A and fractional CFO work.

Questions owners ask

What is the difference between ROE and ROA?

Return on assets measures profit against everything the business owns, however it was paid for; ROE measures it against the owners' share alone. Damodaran defines ROA as after-tax operating income divided by total assets. Because borrowed money adds to assets but not to equity, the gap between the two ratios grows as debt grows.

Can return on equity be negative?

Yes. In a year with a net loss, ROE is negative and shows the loss as a share of equity. When equity itself is negative, the ratio stops working: a loss divided by negative equity gives a positive number. In that case, look at return on capital and at the cash flow the business produces, as described in how to improve cash flow for your business.