What it is
ROE measures how efficiently the business turns shareholders' invested capital into profit.
The "equity" denominator is what shareholders have on the balance sheet — original investment plus all the retained earnings the company has kept over the years.
What to watch for
Two companies with the same ROE can get there differently. One might be highly profitable; another might be using a lot of debt to magnify a smaller operating profit. The DuPont decomposition (margin × turnover × leverage) is how analysts pull this apart.
A high ROE achieved with low debt is generally a stronger signal than the same ROE built on heavy borrowing.