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 Jul 2024:

Industry Average ROE Number of companies
Advertising Agencies -12.7 22
Aerospace & Defense 4.8 49
Agricultural Inputs 6.5 11
Airlines 8.3 13
Apparel Manufacturing 10 16
Apparel Retail 16.9 28
Asset Management 11.6 72
Auto Manufacturers -17 16
Auto Parts 4.8 46
Auto & Truck Dealerships 8.7 14
Banks - Diversified 12.3 6
Banks - Regional 9 274
Beverages - Non-Alcoholic 21.9 9
Beverages - Wineries & Distilleries 14.3 9
Biotechnology -62.3 489
Broadcasting -15.6 16
Building Materials 21.4 7
Building Products & Equipment 17.7 28
Business Equipment & Supplies 9.9 7
Capital Markets 11.7 33
Chemicals 5.5 17
Communication Equipment -7.4 49
Computer Hardware -7.6 28
Conglomerates 4.5 12
Consulting Services 10.8 16
Consumer Electronics -19.5 12
Credit Services 9.5 44
Department Stores 19.6 5
Diagnostics & Research -26.7 65
Discount Stores 19.7 9
Drug Manufacturers - General 24.5 12
Drug Manufacturers - Specialty & Generic -34.4 47
Education & Training Services 7.2 16
Electrical Equipment & Parts 8.1 40
Electronic Components 5.1 30
Electronic Gaming & Multimedia -4.2 7
Electronics & Computer Distribution 11.8 5
Engineering & Construction 9.6 30
Entertainment -17.2 38
Farm & Heavy Construction Machinery 14.5 22
Farm Products 6.8 18
Financial Data & Stock Exchanges 14.2 10
Food Distribution 5.5 9
Footwear & Accessories 17.3 11
Furnishings, Fixtures & Appliances 8.4 18
Gambling 6.5 10
Gold -3.5 27
Grocery Stores 15.6 10
Healthcare Plans -7.9 12
Health Information Services -27.9 30
Home Improvement Retail 2.1 7
Household & Personal Products 10.8 23
Industrial Distribution 13.6 17
Information Technology Services 5.2 53
Insurance Brokers 13.5 12
Insurance - Diversified 15 11
Insurance - Life 14.4 13
Insurance - Property & Casualty 11.4 36
Insurance - Reinsurance 19.8 7
Insurance - Specialty 11.7 16
Integrated Freight & Logistics 10 15
Internet Content & Information -3.7 36
Internet Retail 5.5 22
Leisure 5.5 22
Luxury Goods -4.9 5
Marine Shipping 11.6 23
Medical Care Facilities -12.8 39
Medical Devices -38.6 97
Medical Distribution 9.5 7
Medical Instruments & Supplies -29.7 45
Metal Fabrication 11.9 13
Mortgage Finance 8.3 17
Oil & Gas Drilling 7.3 6
Oil & Gas E&P 13.6 64
Oil & Gas Equipment & Services 8.7 43
Oil & Gas Integrated 12.9 6
Oil & Gas Midstream 20.1 34
Oil & Gas Refining & Marketing 16.4 18
Other Industrial Metals & Mining -12.4 15
Other Precious Metals & Mining 0.5 12
Packaged Foods 9.5 42
Packaging & Containers 12.4 21
Paper & Paper Products -13.8 5
Personal Services 20.2 10
Pharmaceutical Retailers -41.2 8
Pollution & Treatment Controls 5.4 7
Publishing -12.6 7
Railroads 17.4 8
Real Estate - Development 4.1 9
Real Estate - Diversified 3.3 4
Real Estate Services 1.9 25
Recreational Vehicles 0.4 14
REIT - Diversified 5.3 17
REIT - Healthcare Facilities 1.3 15
REIT - Hotel & Motel 0.2 15
REIT - Industrial 5.3 16
REIT - Mortgage 2 35
REIT - Office -3.6 24
REIT - Residential 5.3 18
REIT - Retail 3.9 21
REIT - Specialty 8.7 15
Rental & Leasing Services 14.5 17
Residential Construction 19.8 20
Resorts & Casinos 9.5 18
Restaurants 13.3 40
Scientific & Technical Instruments -11.1 24
Security & Protection Services 15.4 14
Semiconductor Equipment & Materials 7.6 26
Semiconductors -0.3 64
Software - Application -5.3 186
Software - Infrastructure -0.6 89
Solar -15.1 12
Specialty Business Services 11.2 25
Specialty Chemicals 5.2 44
Specialty Industrial Machinery 11.3 73
Specialty Retail 11.3 40
Staffing & Employment Services 11 23
Steel 6.6 15
Telecom Services -4.8 33
Textile Manufacturing -9.3 4
Thermal Coal 22.9 9
Tools & Accessories 13 11
Travel Services 24.4 12
Trucking 10.5 11
Utilities - Diversified 9.6 15
Utilities - Regulated Electric 9 25
Utilities - Regulated Gas 9 14
Utilities - Regulated Water 10.4 12
Utilities - Renewable 4.3 10
Waste Management 5.1 12

The table shows that the Drug Manufacturers - General industry has the highest average ROE of 24.5, followed by Travel Services at 24.4. On the other hand, the Biotechnology industry has the lowest average ROE of -62.3, followed by the Pharmaceutical Retailers industry at -41.2. 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
Drug Manufacturers - General 24.5 12
Travel Services 24.4 12
Thermal Coal 22.9 9
Beverages - Non-Alcoholic 21.9 9
Building Materials 21.4 7
Personal Services 20.2 10
Oil & Gas Midstream 20.1 34
Residential Construction 19.8 20
Insurance - Reinsurance 19.8 7
Discount Stores 19.7 9

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 -62.3 489
Pharmaceutical Retailers -41.2 8
Medical Devices -38.6 97
Drug Manufacturers - Specialty & Generic -34.4 47
Medical Instruments & Supplies -29.7 45
Health Information Services -27.9 30
Diagnostics & Research -26.7 65
Consumer Electronics -19.5 12
Entertainment -17.2 38
Auto Manufacturers -17 16

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.