Return on Equity (ROE) Explained
Why ROE is the single most important profitability ratio — and how to read it on the EGX
The Definition
Return on equity (ROE) is net income divided by average shareholders' equity. It tells you how much profit the business generates for every Egyptian pound of equity capital. An ROE of 20% means the company earns 20 piastres of profit annually for every pound of equity invested.
Over the long run, a stock's compound return cannot meaningfully exceed the underlying business's sustainable ROE. This is why high-ROE businesses, bought at reasonable multiples, are the foundation of long-term compounding.
ROE Quality Check
Headline ROE can be inflated by leverage. A bank with 5% return on assets can generate 20% ROE through normal banking leverage; a similar non-bank business reaching 20% ROE through high debt is taking very different risks.
Always decompose ROE using the DuPont framework: ROE = (net margin) × (asset turnover) × (financial leverage). The same headline number, broken down, can describe very different businesses.
ROE in the Egyptian Context
Top-tier Egyptian banks have produced ROE in the 20–30% range during stable years — well above developed-market peers. This reflects high local interest-rate spreads, low operating costs relative to revenue, and disciplined capital allocation at the strongest names.
For Egyptian industrials and consumer companies, sustained ROE above 15% is a strong signal. Below 8–10% over a multi-year window typically indicates structural challenges or capital misallocation.
Sustainable vs Reported ROE
A high ROE in a single year may be the result of one-off items: real estate revaluations, asset sales, FX translation gains, or favourable tax treatments. Sustainable ROE — the level the business can produce in a normal year, repeatedly — is what matters for long-term value.
Look at five-to-ten-year average ROE for cyclical businesses. A single peak number is rarely the right one to capitalise.
FAQ
What is a 'good' ROE for an Egyptian company?
Above 15% on a sustained basis is a strong result for most non-financial businesses. Top Egyptian banks have historically produced 20–30% in stable years. Below 8% sustained typically signals a value-destroying business or a difficult cycle.
Can ROE be too high?
Mechanically yes — extreme ROE figures often reflect very high leverage rather than genuine operational excellence. The DuPont decomposition reveals which is which.
Should I prefer high ROE or low P/E?
Both, when possible. The strongest long-term outcomes typically come from high-ROE businesses bought at reasonable multiples. A low P/E on a low-ROE business is rarely the better trade over a long horizon.