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.
The average ROE varies significantly by industry. Here is a table showing the average ROE by industries in the US as of Nov 2024:
Industry | Average ROE | Number of companies |
---|---|---|
Advertising Agencies | -9.7 | 24 |
Aerospace & Defense | 5.9 | 53 |
Agricultural Inputs | 5.1 | 11 |
Airlines | 6.3 | 12 |
Apparel Manufacturing | 6 | 16 |
Apparel Retail | 15.2 | 29 |
Asset Management | 8.9 | 77 |
Auto Manufacturers | -3.1 | 16 |
Auto Parts | 4.6 | 47 |
Auto & Truck Dealerships | 7.8 | 14 |
Banks - Diversified | 12.6 | 6 |
Banks - Regional | 8 | 299 |
Beverages - Non-Alcoholic | 32.2 | 12 |
Beverages - Wineries & Distilleries | 9 | 7 |
Biotechnology | -63.7 | 519 |
Broadcasting | -17.8 | 15 |
Building Materials | 18.4 | 9 |
Building Products & Equipment | 18.5 | 29 |
Business Equipment & Supplies | 8.3 | 7 |
Capital Markets | 13.5 | 37 |
Chemicals | 6.6 | 18 |
Communication Equipment | -7.3 | 47 |
Computer Hardware | -10.5 | 27 |
Conglomerates | -1.6 | 13 |
Consulting Services | 12 | 16 |
Consumer Electronics | -19.5 | 12 |
Credit Services | 8.9 | 45 |
Department Stores | 18.5 | 5 |
Diagnostics & Research | -28.9 | 64 |
Discount Stores | 19 | 8 |
Drug Manufacturers - General | 26.5 | 12 |
Drug Manufacturers - Specialty & Generic | -38.4 | 46 |
Education & Training Services | 10.3 | 17 |
Electrical Equipment & Parts | 6.8 | 41 |
Electronic Components | 1.5 | 32 |
Electronic Gaming & Multimedia | -11 | 7 |
Electronics & Computer Distribution | 11.1 | 5 |
Engineering & Construction | 12 | 31 |
Entertainment | -14.5 | 40 |
Farm & Heavy Construction Machinery | 11.4 | 23 |
Farm Products | 9 | 16 |
Financial Data & Stock Exchanges | 12.9 | 11 |
Food Distribution | 6 | 9 |
Footwear & Accessories | 15.8 | 11 |
Furnishings, Fixtures & Appliances | 10.8 | 21 |
Gambling | 16.8 | 11 |
Gold | 0.2 | 28 |
Grocery Stores | 15.2 | 10 |
Healthcare Plans | -20.5 | 12 |
Health Information Services | -26.1 | 34 |
Home Improvement Retail | 4.6 | 7 |
Household & Personal Products | 10.3 | 25 |
Industrial Distribution | 12.7 | 17 |
Information Technology Services | 6.1 | 53 |
Insurance Brokers | 5.3 | 12 |
Insurance - Diversified | 12.9 | 12 |
Insurance - Life | 12.1 | 14 |
Insurance - Property & Casualty | 14 | 37 |
Insurance - Reinsurance | 15.5 | 8 |
Insurance - Specialty | 11.4 | 17 |
Integrated Freight & Logistics | 14.1 | 16 |
Internet Content & Information | -1.8 | 39 |
Internet Retail | 3.1 | 25 |
Leisure | 2 | 26 |
Luxury Goods | 3.1 | 6 |
Marine Shipping | 15.4 | 24 |
Medical Care Facilities | -5.2 | 39 |
Medical Devices | -36.1 | 97 |
Medical Distribution | 8.2 | 7 |
Medical Instruments & Supplies | -30 | 45 |
Metal Fabrication | 12.5 | 13 |
Mortgage Finance | 6.8 | 17 |
Oil & Gas Drilling | 3 | 7 |
Oil & Gas E&P | 14.7 | 62 |
Oil & Gas Equipment & Services | 9.5 | 48 |
Oil & Gas Integrated | 8.9 | 6 |
Oil & Gas Midstream | 18.6 | 36 |
Oil & Gas Refining & Marketing | 9.2 | 17 |
Other Industrial Metals & Mining | -10.7 | 19 |
Other Precious Metals & Mining | 0 | 13 |
Packaged Foods | 10.2 | 43 |
Packaging & Containers | 16.5 | 20 |
Paper & Paper Products | -14.6 | 5 |
Personal Services | 18.2 | 11 |
Pharmaceutical Retailers | -51.9 | 7 |
Pollution & Treatment Controls | 13.3 | 10 |
Publishing | 2.4 | 7 |
Railroads | 19 | 8 |
Real Estate - Development | 3.5 | 10 |
Real Estate - Diversified | 8.3 | 4 |
Real Estate Services | 3.3 | 25 |
Recreational Vehicles | 0.5 | 14 |
REIT - Diversified | 3.6 | 20 |
REIT - Healthcare Facilities | 1.9 | 17 |
REIT - Hotel & Motel | 4 | 15 |
REIT - Industrial | 5.1 | 16 |
REIT - Mortgage | 3.8 | 39 |
REIT - Office | -1.5 | 24 |
REIT - Residential | 3.1 | 18 |
REIT - Retail | 6.2 | 24 |
REIT - Specialty | 9.1 | 16 |
Rental & Leasing Services | 11.1 | 20 |
Residential Construction | 19.5 | 20 |
Resorts & Casinos | 9.1 | 18 |
Restaurants | 13.2 | 43 |
Scientific & Technical Instruments | 6.2 | 24 |
Security & Protection Services | 17.7 | 14 |
Semiconductor Equipment & Materials | 8.1 | 25 |
Semiconductors | 1.6 | 66 |
Software - Application | -5.2 | 195 |
Software - Infrastructure | 0.8 | 98 |
Solar | -9.9 | 13 |
Specialty Business Services | 12.7 | 27 |
Specialty Chemicals | 8.4 | 44 |
Specialty Industrial Machinery | 11.8 | 77 |
Specialty Retail | 14.3 | 39 |
Staffing & Employment Services | 8.4 | 23 |
Steel | 3.4 | 15 |
Telecom Services | -8.2 | 33 |
Thermal Coal | 16.9 | 9 |
Tools & Accessories | 11.4 | 10 |
Travel Services | 26.9 | 12 |
Trucking | 8.6 | 12 |
Utilities - Diversified | 9.2 | 15 |
Utilities - Regulated Electric | 9.6 | 25 |
Utilities - Regulated Gas | 10.2 | 14 |
Utilities - Regulated Water | 9.7 | 13 |
Utilities - Renewable | 5 | 12 |
Waste Management | 5 | 13 |
The table shows that the Beverages - Non-Alcoholic industry has the highest average ROE of 32.2, followed by Travel Services at 26.9. On the other hand, the Biotechnology industry has the lowest average ROE of -63.7, followed by the Pharmaceutical Retailers industry at -51.9. This variation is due to several factors, including industry-specific earnings and growth prospects, and management's outlook on future performance
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 |
---|---|---|
Beverages - Non-Alcoholic | 32.2 | 12 |
Travel Services | 26.9 | 12 |
Drug Manufacturers - General | 26.5 | 12 |
Residential Construction | 19.5 | 20 |
Railroads | 19 | 8 |
Discount Stores | 19 | 8 |
Oil & Gas Midstream | 18.6 | 36 |
Department Stores | 18.5 | 5 |
Building Products & Equipment | 18.5 | 29 |
Building Materials | 18.4 | 9 |
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 | -63.7 | 519 |
Pharmaceutical Retailers | -51.9 | 7 |
Drug Manufacturers - Specialty & Generic | -38.4 | 46 |
Medical Devices | -36.1 | 97 |
Medical Instruments & Supplies | -30 | 45 |
Diagnostics & Research | -28.9 | 64 |
Health Information Services | -26.1 | 34 |
Healthcare Plans | -20.5 | 12 |
Consumer Electronics | -19.5 | 12 |
Broadcasting | -17.8 | 15 |
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 significantly varies across different industries, reflecting the diverse operational models, capital structures, and market conditions that characterize each sector:
These variations underscore the necessity to consider industry-specific factors, such as capital intensity, market dynamics, and regulatory environments, when evaluating ROE.
Several key factors influence ROE, varying by industry:
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.
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.
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.
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.