Return on Equity (ROE)

Return on Equity (ROE): How Efficiently Is Your Money Working?

Return on Equity measures how effectively a company uses shareholders' money to generate profits. It is one of the best indicators of management quality and business efficiency.

The Formula

ROE = Net Profit / Shareholders' Equity x 100

If a company has net profit of KES 10 billion and shareholders' equity of KES 50 billion, the ROE is 20%. This means for every KES 100 shareholders have invested, the company generated KES 20 in profit.

What ROE Tells You

• ROE above 15% — Generally considered strong. It means the company is generating good returns on shareholders' capital. Top NSE performers like Equity Group and Safaricom consistently achieve ROEs in this range.
• ROE of 10-15% — Decent, but there may be room for improvement.
• ROE below 10% — The company is not using shareholders' money very efficiently. Compare with the risk-free rate (like Treasury bill rates) to see if you could earn more with less risk.

Comparing ROE Across Sectors on the NSE

Different sectors have different typical ROE ranges:

• Banking sector — Well-run banks like Equity Group often achieve ROEs of 20% or more, making them among the most efficient companies on the NSE.
• Telecommunications — Safaricom's ROE is typically high due to its dominant market position and asset-light M-Pesa business.
• Manufacturing — Companies like EABL and BAT tend to have moderate to strong ROEs depending on market conditions.
• Real estate and construction — Often have lower ROEs due to the capital-intensive nature of the business.

Caution: High ROE Is Not Always Good

• Excessive debt — A company can artificially boost ROE by taking on heavy debt, which reduces equity. Always check the debt level alongside ROE.
• Shrinking equity — If equity is falling due to losses, ROE can appear to improve while the company is actually deteriorating.
• One-time gains — A large one-time profit will inflate ROE temporarily. Look at ROE trends over 3 to 5 years for a true picture.