Return on Equity (ROE)
Measures how much profit a company generates per dollar of shareholder equity.
Definition
Return on equity indicates how effectively management uses shareholder capital to generate profits. For banks, ROE is the gold-standard profitability metric. A bank that consistently earns above its cost of equity is creating shareholder value and typically commands a P/B ratio above 1.0.
Formula
ROE = Net Income / Average Stockholders' Equity × 100
Why It Matters
An ROE above 10-12% is generally considered strong for a bank. Banks with higher ROE can grow earnings faster through retained earnings without needing to raise expensive external capital.