Return on Equity (ROE) by industry

Return on Equity (ROE) is a pivotal financial metric that measures the amount of net income returned as a percentage of shareholders' equity, essentially quantifying a company's ability to generate profits from its equity investments. The formula for calculating ROE is given by:

Return on Equity = Net Income / Average Shareholders Equity

ROE is esteemed for its capacity to reveal the efficiency with which a company employs shareholders' equity to produce income, serving as a critical indicator of financial health and operational efficiency. It enables investors to gauge the profitability and potential for a company's future growth relative to its equity base.

Average ROE by Industry

The average ROE varies significantly by industry. Here is a table showing the average ROE by industries in the US as of May 2024:

Industry	Average ROE	Number of companies
Advertising Agencies	-9.3	22
Aerospace & Defense	3.4	49
Agricultural Inputs	9.3	11
Airlines	0.5	13
Apparel Manufacturing	10.8	17
Apparel Retail	16.8	28
Asset Management	11.6	72
Auto Manufacturers	-16.2	15
Auto Parts	2.1	46
Auto & Truck Dealerships	6.6	14
Banks - Diversified	12	6
Banks - Regional	9.4	276
Beverages - Non-Alcoholic	22.9	9
Beverages - Wineries & Distilleries	12.5	9
Biotechnology	-63.2	504
Broadcasting	-11.9	16
Building Materials	22.2	7
Building Products & Equipment	16.7	29
Business Equipment & Supplies	10	7
Capital Markets	12	33
Chemicals	6.3	17
Communication Equipment	-7.6	51
Computer Hardware	-7.5	29
Conglomerates	3.4	12
Consulting Services	13.1	16
Consumer Electronics	-14	12
Credit Services	9.9	44
Department Stores	16.6	5
Diagnostics & Research	-26	67
Discount Stores	20	9
Drug Manufacturers - General	26.1	12
Drug Manufacturers - Specialty & Generic	-38.3	48
Education & Training Services	7	16
Electrical Equipment & Parts	7.3	42
Electronic Components	4.4	30
Electronic Gaming & Multimedia	1.5	7
Electronics & Computer Distribution	9.6	6
Engineering & Construction	9.4	30
Entertainment	-8.5	37
Farm & Heavy Construction Machinery	14.7	22
Farm Products	6.9	18
Financial Data & Stock Exchanges	14.2	10
Food Distribution	5.8	9
Footwear & Accessories	19.2	11
Furnishings, Fixtures & Appliances	8.8	19
Gambling	15.9	10
Gold	-3.7	27
Grocery Stores	17	10
Healthcare Plans	-7.7	12
Health Information Services	-24.8	32
Home Improvement Retail	-7.5	7
Household & Personal Products	11.1	24
Industrial Distribution	13.7	17
Information Technology Services	6.6	53
Insurance Brokers	13.4	12
Insurance - Diversified	17.4	11
Insurance - Life	13.4	15
Insurance - Property & Casualty	11.7	36
Insurance - Reinsurance	18.7	7
Insurance - Specialty	10.6	16
Integrated Freight & Logistics	16.5	15
Internet Content & Information	-7.9	36
Internet Retail	-2	22
Leisure	0.1	23
Luxury Goods	-3	5
Marine Shipping	12.3	23
Medical Care Facilities	-13.5	39
Medical Devices	-33.2	102
Medical Distribution	5.1	7
Medical Instruments & Supplies	-26.3	45
Metal Fabrication	12	13
Mortgage Finance	8.3	17
Oil & Gas Drilling	8	6
Oil & Gas E&P	15.2	64
Oil & Gas Equipment & Services	12.9	43
Oil & Gas Integrated	14	6
Oil & Gas Midstream	20.3	36
Oil & Gas Refining & Marketing	12.1	18
Other Industrial Metals & Mining	-10.9	15
Other Precious Metals & Mining	0.2	12
Packaged Foods	8.6	42
Packaging & Containers	9.9	22
Paper & Paper Products	-9.8	5
Personal Services	20.1	10
Pharmaceutical Retailers	-9.2	8
Pollution & Treatment Controls	4.6	7
Publishing	-11.6	7
Railroads	16.6	8
Real Estate - Development	4.5	9
Real Estate - Diversified	2.5	4
Real Estate Services	2.1	24
Recreational Vehicles	1.8	14
REIT - Diversified	5.5	17
REIT - Healthcare Facilities	2.4	15
REIT - Hotel & Motel	1	15
REIT - Industrial	5.3	16
REIT - Mortgage	1.3	35
REIT - Office	-3.6	24
REIT - Residential	5.2	19
REIT - Retail	5.4	21
REIT - Specialty	8.3	15
Rental & Leasing Services	14	19
Residential Construction	20.1	20
Resorts & Casinos	10.2	18
Restaurants	18	41
Scientific & Technical Instruments	-5.9	24
Security & Protection Services	13.9	14
Semiconductor Equipment & Materials	8.4	26
Semiconductors	0.5	64
Software - Application	-6.6	192
Software - Infrastructure	-1.4	89
Solar	-13.5	13
Specialty Business Services	10.8	26
Specialty Chemicals	4.7	46
Specialty Industrial Machinery	11.8	73
Specialty Retail	14.1	40
Staffing & Employment Services	10.6	23
Steel	9.2	15
Telecom Services	-4.5	33
Textile Manufacturing	-8.5	4
Thermal Coal	27.9	9
Tools & Accessories	13.9	11
Travel Services	20.7	13
Trucking	11.1	11
Utilities - Diversified	9.5	15
Utilities - Regulated Electric	9.1	25
Utilities - Regulated Gas	8.7	14
Utilities - Regulated Water	10.7	12
Utilities - Renewable	4	11
Waste Management	5.8	12

The table shows that the Thermal Coal industry has the highest average ROE of 27.9, followed by Drug Manufacturers - General at 26.1. On the other hand, the Biotechnology industry has the lowest average ROE of -63.2, followed by the Drug Manufacturers - Specialty & Generic industry at -38.3. This variation is due to several factors, including industry-specific earnings and growth prospects, and management's outlook on future performance

Industries with highest ROE

The following chart and table show industries with the highest ROE. You can filter the industries by sector in the chart below to see a breakdown of the top industries with the highest ROE for every sector.

Industry	Average ROE	Number of companies
Thermal Coal	27.9	9
Drug Manufacturers - General	26.1	12
Beverages - Non-Alcoholic	22.9	9
Building Materials	22.2	7
Travel Services	20.7	13
Oil & Gas Midstream	20.3	36
Residential Construction	20.1	20
Personal Services	20.1	10
Discount Stores	20	9
Footwear & Accessories	19.2	11

Industries with lowest ROE

The following chart and table presents industries with the lowest ROE. Within the chart below, you can also refine the industries by sector, allowing you to observe a breakdown of the top industries with the lowest ROE in each sector.

Industry	Average ROE	Number of companies
Biotechnology	-63.2	504
Drug Manufacturers - Specialty & Generic	-38.3	48
Medical Devices	-33.2	102
Medical Instruments & Supplies	-26.3	45
Diagnostics & Research	-26	67
Health Information Services	-24.8	32
Auto Manufacturers	-16.2	15
Consumer Electronics	-14	12
Medical Care Facilities	-13.5	39
Solar	-13.5	13

Understanding ROE Components

At its core, ROE involves two primary components: net income and shareholders' equity. Net income, derived from the company's income statement, represents the profit after all expenses, taxes, and costs have been subtracted from total revenue. Shareholders' equity, found on the balance sheet, is the amount that would be returned to shareholders if all the company's assets were liquidated and all its debts repaid.

The relationship between these components underlines the importance of leveraging and financial strategy in influencing ROE. A company might employ debt financing to boost its ROE by increasing its net income through investments funded by borrowed money, albeit at the risk of higher volatility and financial risk.

ROE by Industry Analysis

ROE significantly varies across different industries, reflecting the diverse operational models, capital structures, and market conditions that characterize each sector:

High ROE Industries: Technology and pharmaceuticals often showcase high ROE figures due to their low capital requirements and high-profit margins. Financial services also tend to have high ROE, attributed to leveraging customer deposits to generate income.
Low ROE Industries: Utilities and transportation, characterized by high capital expenditures and regulatory constraints, typically exhibit lower ROE. Heavy machinery and similar capital-intensive sectors also face challenges in achieving high ROE due to the significant investment in physical assets required for operations.

These variations underscore the necessity to consider industry-specific factors, such as capital intensity, market dynamics, and regulatory environments, when evaluating ROE.

Factors Affecting ROE

Several key factors influence ROE, varying by industry:

Profit Margins: Industries with higher profit margins, such as technology and pharmaceuticals, can achieve higher ROE as they generate more income per dollar of sales.
Asset Turnover: Sectors like retail might have lower profit margins but compensate with high asset turnover, indicating efficient inventory management and sales processes.
Financial Leverage: Companies in capital-intensive industries, such as utilities, might employ more debt to finance their operations, affecting their ROE through the equity multiplier component.

Industry-specific risks, such as regulatory changes, market volatility, and economic cycles, also significantly impact ROE, underlining the importance of contextual analysis in financial evaluation.

Interpreting ROE in Investment Decisions

ROE, or Return on Equity, is an essential metric that investors use to evaluate a company's profitability and growth potential. However, it's important to note that a high ROE doesn't necessarily mean a company is doing well. The high ROE could be due to excessive debt, which is not a good sign. Investors should thus use ROE along with other financial metrics and industry benchmarks to make informed decisions.

By analyzing ROE within an industry context, investors can identify companies that are performing well and have sustainable business models. However, it's important to be aware of the limitations of ROE. For instance, ROE is sensitive to leverage, and it can be distorted by non-recurring items or accounting practices.

ROE vs ROA

Return on Equity (ROE) and Return on Assets (ROA) are two important indicators used to evaluate a company's profitability and efficiency. However, these metrics are influenced differently based on the industry. To understand the difference between ROE and ROA, and to determine their significance in different industries, it is necessary to examine what each ratio represents and how industry-specific factors impact these ratios.

Key Differences in Industry Context

Impact of Leverage: The level of debt financing in a company's capital structure has a direct impact on its Return on Equity (ROE). Companies operating in industries that usually use high levels of debt financing, such as banking and financial services, can influence their ROE by utilizing leverage. Return on Assets (ROA), on the other hand, focuses solely on asset efficiency and is less affected by leverage. Therefore, ROA provides a more accurate measure of operational efficiency.
Capital Intensity: The capital intensity of an industry plays a crucial role in its typical return on assets (ROA) figures. Industries that require a significant investment in physical assets, such as manufacturing and utilities, tend to have lower ROA because the denominator, i.e., total assets, is large. However, return on equity (ROE) might not be as directly impacted by capital intensity, assuming the equity portion is not disproportionately large.
Profitability and Efficiency: Return on Equity (ROE) and Return on Assets (ROA) are both metrics that help assess profitability, but from different perspectives. ROE measures how well a company utilizes equity financing to generate profits, making it particularly relevant in industries where equity financing is a significant factor. On the other hand, ROA evaluates how effectively a company uses all its assets, regardless of financing sources, to generate earnings. This makes it a critical measure to evaluate operational efficiency across all industries, especially those with a large asset base.

In essence, both Return on Equity (ROE) and Return on Assets (ROA) provide useful information regarding a company's financial status. However, it is important to consider the impact of industry characteristics on these ratios. This understanding is critical for investors, analysts, and managers, who need to make informed decisions, compare performance, and devise strategies that are tailored to the specific challenges and opportunities presented by their industry.