Return on equity, or ROE, is calculated by dividing a company's earnings during the past four quarters by shareholders' equity. The ROE figure we use in Investor's Business Daily® is the Average Return on Equity from Continuing Operations. The net income from continuing operations is net income, excluding income from discontinued operations, accounting changes or one-time gains or losses.
ROE indicates how well a company is being managed to allow a profit on its shareholder's money. It is also a reliable indicator of a company's future earnings. The best-performing companies tend to have ROEs of 20 to 30 percent and sometimes even higher. When evaluating a stock, we recommend that its ROE be at least 17 percent.