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Apr 17, 2026 | 8 min read | By Simplegence

What Is ROE — Return on Equity and Why Warren Buffett Loves It

Q: What is a good ROE for Indian companies?

As a general rule, an ROE consistently above 15% is considered good for most sectors. Warren Buffett famously prefers companies with ROE above 15% for at least 10 consecutive years. FMCG, IT, and consumer brands in India often deliver ROE of 20–40%+. Banks typically target 12–18%. Capital-intensive industries like steel or utilities may deliver 8–12% ROE and that can still be acceptable given their asset base.

Q: What is the DuPont analysis of ROE?

DuPont analysis breaks ROE into three components: ROE = Net Profit Margin × Asset Turnover × Financial Leverage. Net Profit Margin shows how efficiently the company converts revenue to profit. Asset Turnover shows how efficiently it uses assets to generate revenue. Financial Leverage shows how much of the asset base is funded by debt. A company can have high ROE through any combination of these three levers — DuPont helps you understand which lever is driving it.

Q: Can high ROE be misleading?

Yes. A company can boost ROE by taking on more debt (increasing financial leverage). If a company uses debt to fund operations and delivers high ROE, the ROE looks impressive but the risk profile is elevated. This is why ROE should always be evaluated alongside the debt-to-equity ratio. A company with 50% ROE but 80% of its assets funded by debt is very different from a debt-free company with the same ROE.

Q: Why does Warren Buffett use ROE as a screening tool?

Buffett views consistently high ROE as a sign of a durable competitive advantage (moat). If a company can earn 20%+ on its equity year after year, it means competitors cannot easily eat into its profits. A moat protects the business from competition, allowing superior returns to persist. Buffett's threshold is generally 15%+ ROE for 10 consecutive years. He also looks for ROE without excessive debt — equity-funded high ROE is the gold standard.

Q: What is the difference between ROE and ROCE?

ROE (Return on Equity) measures return relative to only shareholders' equity. ROCE (Return on Capital Employed) measures return relative to total capital — both equity and debt. For companies with zero or minimal debt, ROE and ROCE will be similar. For debt-heavy companies, ROE can look inflated because the equity base is smaller. ROCE is generally more useful for comparing capital-intensive businesses and companies with different debt levels.

Gajanand SharmaFounder, Simplegence · LinkedIn ↗Published 16 April 2026

The Metric That Separates Great Businesses from Average Ones

Warren Buffett has said that his favourite holding period is "forever" — but he only holds companies that generate consistently high returns on equity. ROE, in Buffett's view, is one of the clearest indicators of a durable competitive advantage.

A company that consistently earns 25% ROE is doing something its competitors cannot easily replicate. That "something" is what separates great businesses from merely adequate ones.

This guide explains ROE — the formula, sector benchmarks, the DuPont breakdown that shows what's driving the ROE, and the important caveat about when high ROE is artificially inflated by debt.

What Is ROE?

Return on Equity (ROE) measures how much profit a company generates for every rupee of shareholders' equity invested in the business.

ROE = Net Profit ÷ Shareholders' Equity × 100

If a company has shareholders' equity of ₹1,000 crore and earns net profit of ₹200 crore, its ROE is 20%. This means it generates ₹20 of profit for every ₹100 of equity shareholders have invested.

Shareholders' equity = Total Assets − Total Liabilities = Paid-up capital + Reserves and Surplus (accumulated retained profits). It represents what shareholders actually own after all debts are paid.

What Is a Good ROE?

As a rule of thumb, ROE consistently above 15% is considered good for most sectors in India. Warren Buffett's threshold is 15%+ for at least 10 consecutive years. Here is how ROE ranges look across sectors:

FMCG / Consumer brands: 20–50%+ (Nestle India, Asian Paints, Pidilite)
IT Services: 25–45% (TCS, Infosys — asset-light, high-margin businesses)
Private Banks: 12–18% (lower due to capital requirements)
Capital-intensive (Steel, Cement, Utilities): 8–15% (acceptable given asset base)
PSU Companies: Highly variable — often 8–12%

ROE of Well-Known Indian Companies — Illustrative Data

Company	Sector	Approx. ROE (Illustrative)	What Drives It
Asian Paints	Paints / FMCG	~55–65%	Brand moat, high margins, asset-light
TCS	IT Services	~40–50%	High margins, minimal capital required
Infosys	IT Services	~28–35%	Strong but below TCS due to cash reserves
HDFC Bank	Private Bank	~14–18%	Constrained by capital adequacy norms
ITC	FMCG / Cigarettes	~23–28%	Cigarette cash flows, improving FMCG
Tata Steel	Steel	~8–15% (cyclical)	Capital-intensive; swings with commodity cycle

Approximate illustrative values for educational purposes only. Actual ROE varies with profitability cycles.

The DuPont Analysis — What's Really Driving the ROE

Two companies can both have 20% ROE but get there in completely different ways. DuPont analysis breaks ROE into its three underlying drivers:

ROE = Net Profit Margin × Asset Turnover × Financial Leverage

Net Profit Margin (Net Profit ÷ Revenue): How efficiently the company converts revenue to profit
Asset Turnover (Revenue ÷ Total Assets): How efficiently it uses assets to generate revenue
Financial Leverage (Total Assets ÷ Equity): How much of assets are funded by debt vs equity

Why DuPont Matters

A luxury brand like Titan achieves high ROE through high profit margins. A retail business like DMart achieves it through very high asset turnover (rapid inventory turns). A highly leveraged company achieves it through financial leverage.

The first two (margins and asset efficiency) represent genuine business quality. High ROE from leverage is riskier — the debt that boosts ROE can become dangerous in a downturn.

Tip — The Screener.in Filter:

On Screener.in, you can filter for companies with ROE > 20% for the last 5 years. This simple filter eliminates most mediocre businesses and surfaces quality compounders. Pair it with low debt (D/E < 0.5) to ensure the ROE isn't debt-driven.

When High ROE Is Misleading — The Debt Lever

Imagine two companies both earning ₹100 crore profit. Company A has ₹500 crore equity and no debt → ROE = 20%. Company B has ₹200 crore equity and ₹800 crore debt → ROE = 50%. Company B's ROE looks spectacular, but it is entirely driven by financial leverage.

If business conditions deteriorate and profits fall, Company B's equity can be quickly wiped out by interest payments and debt repayment obligations. Company A sails through. High debt-funded ROE is a house of cards.

Warning: Always check D/E alongside ROE

Before celebrating a high ROE, check the debt-to-equity ratio. If D/E is above 1.5–2x, much of the ROE may be leverage-driven. The safest high-ROE businesses are those with low or zero debt — like TCS, Asian Paints, or Nestle India — where high ROE comes purely from superior business economics.

ROE vs ROCE — Which One to Use?

ROE measures returns on equity only. ROCE (Return on Capital Employed) measures returns on all capital — both equity and debt. For debt-heavy businesses, ROCE is a more honest measure of business efficiency. We cover ROCE in detail in the next article in this series.

As a quick rule: use ROE for asset-light businesses with minimal debt (IT, FMCG). Use ROCE for capital-intensive or debt-heavy businesses (manufacturing, utilities, banks). Use both together for a complete picture.

Master Fundamental Analysis — Read the Complete Guide

ROE is one piece of the puzzle. Learn how to read balance sheets, cash flow statements, analyse moats, and evaluate any Indian stock from scratch.

Read the Complete Fundamental Analysis Guide →

Frequently Asked Questions

What is a good ROE for Indian companies?

As a general rule, an ROE consistently above 15% is considered good for most sectors. Warren Buffett prefers companies with ROE above 15% for at least 10 consecutive years. FMCG, IT, and consumer brands in India often deliver ROE of 20–40%+. Banks typically target 12–18% due to capital adequacy norms. Capital-intensive industries may deliver 8–12% ROE, which can still be acceptable given their asset base. Always compare ROE within the same sector.

What is the DuPont analysis of ROE?

DuPont analysis breaks ROE into three components: ROE = Net Profit Margin × Asset Turnover × Financial Leverage. Net Profit Margin shows how efficiently the company converts revenue to profit. Asset Turnover shows how efficiently it uses assets to generate revenue. Financial Leverage shows how much of the asset base is funded by debt. A company can have high ROE through any combination of these — DuPont helps you understand which lever is driving it, and whether that source of ROE is sustainable.

Can high ROE be misleading?

Yes. A company can boost ROE by taking on more debt (increasing financial leverage). If a company funds operations with heavy debt, the equity base shrinks, making ROE appear high. But this elevated ROE comes with significant risk — interest payments and debt repayment can become a burden when business conditions deteriorate. Always check ROE alongside the debt-to-equity ratio. ROE funded by genuine business efficiency (high margins, efficient asset use) is far more valuable than ROE funded by financial leverage.

Why does Warren Buffett use ROE as a screening tool?

Buffett views consistently high ROE as a sign of a durable competitive advantage (moat). If a company can earn 20%+ on equity year after year, it means competitors cannot easily replicate its business model. A moat — whether from brand, switching costs, or network effects — protects the business and allows superior returns to persist. Buffett's threshold is generally 15%+ ROE for 10 consecutive years, financed without excessive debt. He specifically looks for companies that can reinvest retained earnings at high ROE — compounding wealth at high rates over decades.

What is the difference between ROE and ROCE?

ROE measures return relative to only shareholders' equity. ROCE measures return relative to total capital — both equity and debt. For companies with zero or minimal debt, ROE and ROCE will be similar. For debt-heavy companies, ROE can look inflated because the equity base is smaller. ROCE is generally more useful for comparing capital-intensive businesses and companies with different debt levels, as it captures the full picture of capital efficiency regardless of how the company is financed.