Return on Equity (ROE) Explained for 2025: Why It Matters for Australian Investors

Return on Equity (ROE) is more than just a finance buzzword – it’s the north star for investors tracking company performance. As 2025 brings new economic twists, understanding ROE could be the difference between a mediocre portfolio and standout results. Let’s break down why ROE is so important for Australians and how you can use it to sharpen your investment strategy.

What is Return on Equity (ROE) and Why Should You Care?

ROE measures how effectively a company turns shareholder funds into profits. Put simply, it shows how much profit a company makes for every dollar of equity. The formula is straightforward:

• ROE = Net Profit / Shareholders’ Equity

For example, if a company earns $2 million in net profit and has $10 million in equity, its ROE is 20%. This means for every dollar invested by shareholders, the company returns 20 cents in profit.

In 2025, with the ASX experiencing renewed volatility and sectors like tech and renewables seeing rapid growth, investors are increasingly scrutinising ROE to separate strong performers from the rest. High ROE often signals efficient management, strong profitability, and potential for future growth.

How ROE Reflects Company Strength (and Its Limitations)

ROE is a favourite for comparing companies in the same sector. Take the Australian banks: in the wake of the 2024 APRA reforms, banks are required to hold more capital, which has slightly lowered industry-wide ROE. However, some banks have bucked the trend by improving operational efficiency, maintaining an ROE above 12% in early 2025. This makes them stand out to investors looking for stable returns.

However, ROE isn’t foolproof. Here’s what to watch out for:

• High debt can inflate ROE: Companies with lots of debt may show an artificially high ROE. Always check the debt-to-equity ratio alongside ROE.
• Industry differences: A great ROE for a utility company might look average for a tech firm. Always compare ROE within the same industry.
• One-off events: Asset sales or tax breaks can temporarily boost ROE, so dig into the details behind the numbers.

ROE is best used as a trend: Is it rising, stable, or falling over several years? That tells you far more than a single snapshot.

ROE Trends and Policy Shifts in 2025

In 2025, several Australian policy changes are influencing how companies manage their equity and profits, with flow-on effects for ROE:

• Climate finance: New government incentives for green infrastructure have led renewable energy companies to invest heavily, impacting both their equity base and net profit. Investors should look for improving ROE as these investments start to pay off.
• Tax reform: The 2025 corporate tax rate cut to 25% for SMEs means more retained profits, potentially lifting ROE for smaller listed companies.
• Superannuation funds: As super funds become more active shareholders, their focus on sustainable ROE is pushing boards to prioritise long-term profitability over short-term gains.

For example, AGL Energy has announced a renewed focus on capital efficiency in response to both investor pressure and regulatory changes. Its target: raising ROE by 2 percentage points by 2026 through smarter asset management and cost reductions.

How to Use ROE in Your Investment Research

ROE isn’t just for analysts in glass towers – it’s a practical tool for any Aussie investor. Here’s how to put it to work:

1. Compare similar companies: Use ROE to rank companies within the same sector. A consistently higher ROE often signals a well-run business.
2. Spot red flags: Watch for sudden spikes or drops in ROE, which can indicate underlying business changes or risks.
3. Combine with other ratios: Pair ROE with return on assets (ROA), profit margins, and debt ratios for a full financial health check.
4. Track the trend: Look at ROE over five years to identify whether management is building or eroding value.

Australian share platforms like CommSec, Selfwealth, and Sharesight all display ROE data, making it easy to integrate into your research routine.

The Bottom Line: ROE is Your Investment Compass in 2025

As the Australian market evolves, ROE remains a powerful, easy-to-understand measure of company performance. In a year of policy shifts and new economic cycles, paying attention to ROE can help you spot the companies that are genuinely growing shareholder value. Add ROE to your investment toolkit, and you’ll be ahead of the curve in 2025.