Return on equity (ROE) is one of the most important quality numbers in value investing. Equity is the money shareholders put in plus the profits the company kept instead of paying out. ROE tells you how much profit the business generates for each dollar of that equity.
Warren Buffett looks for businesses that earn a high ROE year after year without borrowing much, because that points to a strong, lasting advantage over rivals. As a rough guide, an ROE that stays above roughly 15% over many years, when debt is not the reason for it, is a good sign.
The catch is that borrowing can artificially inflate ROE. A company with $10M of equity, $90M of debt, and $5M of profit shows a 50% ROE, but it might be one bad year away from collapse. So always read ROE alongside debt-to-equity and return on invested capital (ROIC), which strip out that distortion and show whether the return is real quality or just leverage.