Picture two companies: both boast a Return on Equity (ROE) north of 15%. One is a global bank, the other a software giant. The headlines scream “stellar performance”—but what’s really under the hood? In the world of ratios, ROE is the electric clock in the new Rolls-Royce: it’s what everyone notices, yet it quietly conceals the true engine driving returns.

Is high ROE always a green light?

Not so fast. ROE is seductive because it seems simple: profits divided by shareholders’ equity. But scratch beneath the surface, and you’ll find that financial leverage—how much debt a company uses—can make a modest business look like a superstar. The effect isn’t just company-specific; it’s woven deep into sector DNA.

Financials: The ROE Illusionists

Walk into the financial sector, and you’ll see ROEs that regularly eclipse those in any other industry. Banks and insurers have made an art of borrowing cheaply and lending at a premium. Their business model is leverage. A bank leverages every dollar of equity into $10 or more of assets, amplifying both profits—and risk.

So when you see a bank with a 14% ROE, remember: much of that is borrowed thunder. Strip away the leverage, and core profitability shrinks. For financials, high ROE isn’t necessarily a sign of superior efficiency—it’s the house style.

Industrials and Tech: When ROE Means Innovation, Not Leverage

Now, look at industrials, technology, or healthcare. Leverage here is often minimal. A double-digit ROE in these sectors signals robust margins, asset-light business models, or capital discipline. In tech, for example, a 20% ROE rarely comes from debt. Instead, it’s the product of high returns on invested capital (ROIC) and relentless scalability.

The nuance: Compare a tech firm’s ROE to a bank’s, and you’re not comparing apples to apples. The former reflects business quality; the latter, the ability to borrow.

The DuPont Dissection: X-Raying the Ratio

Think of the classic DuPont formula as your MRI for ROE:

Here’s the trick: in financials, the equity multiplier—the leverage leg—is the secret sauce. In asset-light tech, it’s all about margin and turnover. ROE’s anatomy changes by industry, and so should your interpretation.

Why a 12% ROE Isn’t Always “Better” Than 8%

Suppose a regional bank posts a 12% ROE, while a utility company delivers 8%. On paper, the bank wins. But what if the utility’s equity multiplier is just 2x, while the bank’s is 12x? The utility is generating returns from core operations, not leverage. The bank is riding the risk curve.

This is why sector context is not just a footnote—it’s the plot twist. Blindly chasing high ROE can lead you into the arms of hidden leverage risk, especially in late-cycle environments or when credit conditions tighten.

Beyond the Headline Number: The Sector Detective’s Toolkit

• Compare ROE to ROA (Return on Assets): If ROE far outpaces ROA, leverage is driving returns.
• Decompose ROE using DuPont: See which lever—margin, turnover, or leverage—is doing the heavy lifting.
• Benchmark by sector: A “good” ROE in banks is not the same as in consumer staples or tech.
• Watch for sudden jumps: A soaring ROE can signal rising leverage—and rising risk.

The Final Reveal: ROE’s Double-Edged Sword

ROE is a master illusionist. It can make leverage look like genius, and mask business fragility with borrowed capital. The ratio is only as meaningful as the sector lens you use to interpret it. For CFA students, analysts, and capital allocators, the real question isn’t “How high is the ROE?”—it’s “Where does the ROE come from?”

Because in finance, as in life, what you don’t see often matters most.