Return on Equity by Industry: What's a Good ROE?
A good return on equity (ROE) depends on the industry because different business models require very different amounts of capital. A 10% ROE can be weak for software, solid for a utility, and normal for a bank depending on the quality of earnings and balance-sheet risk behind it.
If you compare ROE across the whole market without sector context, you will misread the number. Asset-light companies such as software platforms can earn very high ROEs because they need relatively little equity to scale. Regulated or capital-heavy sectors such as utilities, industrials, and real estate usually earn lower ROEs because they need far more assets and equity to produce the same dollar of profit.
That is why the real question is not "Is this ROE high?" but "Is this ROE strong for this industry, and is it being earned in a healthy way?"
TL;DR: ROE is only useful when you compare companies that operate under similar economics. Software and branded consumer businesses often post ROEs above 20%, while utilities and banks usually deserve lower benchmark ranges. On ScreenerHub, use ROE as a same-sector quality filter first, then validate it with ROIC, margin, and debt checks.
Why Industry Context Changes ROE
ROE measures how much net income a company generates relative to shareholder equity. The formula is simple, but the economics underneath it are not.
Two sectors can produce the same net margin and still end up with very different ROEs because the balance sheets are built differently.
- Asset-light sectors such as software, payments, and some branded consumer businesses can grow with relatively little incremental equity.
- Capital-heavy sectors such as utilities, manufacturers, and real estate need much larger asset bases, which usually pushes ROE down.
- Leveraged sectors such as banks can report solid ROEs even when their economics look very different from non-financial businesses.
That is why a single market-wide ROE threshold produces noisy results. It over-rewards some sectors and unfairly penalizes others.
| If you compare ROE... | What usually happens |
|---|---|
| Across the whole market | Software and buyback-heavy companies dominate the top of the list |
| Within the same sector | You get a cleaner view of operational quality |
| Without debt checks | Leveraged companies can look stronger than they really are |
ROE by Industry: Typical Benchmark Ranges
The ranges below are approximate public-market benchmarks, not hard rules. They shift over time with interest rates, margins, buyback activity, and the business cycle. Still, they are useful starting points for screening.
| Industry or Sector | Typical ROE Range | What Usually Drives It |
|---|---|---|
| Software / SaaS | 20% - 40%+ | Asset-light models, recurring revenue, high gross margins |
| Consumer Brands / Staples | 15% - 30% | Pricing power, stable demand, frequent buybacks |
| Healthcare / Pharma | 12% - 25% | Strong margins, IP advantages, but uneven product cycles |
| Industrials | 10% - 18% | Moderate returns in more asset-heavy operations |
| Banks / Financials | 8% - 16% | Leverage is part of the model, so ROE is a core profitability metric |
| Utilities | 8% - 12% | Regulated returns and heavy capital requirements |
| Energy | 5% - 18% | Commodity cycles can swing ROE sharply |
| Real Estate / REITs | 5% - 12% | Asset-heavy structures and debt-heavy balance sheets |
The main takeaway is simple: a "good" ROE starts with the industry's capital structure. A 12% ROE may be disappointing for a software company but perfectly respectable for a regulated utility.
What Counts as a Good ROE in Practice?
Instead of memorizing one universal number, it helps to use a sector-aware benchmark.
| Industry group | Usually weak | Usually solid | Usually strong |
|---|---|---|---|
| Asset-light growth sectors | Below 10% | 10% - 20% | Above 20% |
| Mature branded sectors | Below 8% | 8% - 18% | Above 18% |
| Industrials / materials | Below 6% | 6% - 14% | Above 14% |
| Banks / insurers | Below 8% | 8% - 13% | Above 13% |
| Utilities / REITs | Below 5% | 5% - 10% | Above 10% |
These thresholds are best used as a first-pass filter, not a final verdict. A company with a merely average ROE may still be investable if margins are improving, debt is falling, and valuation is attractive. A company with a very high ROE may still be a bad candidate if leverage or buybacks are doing most of the work.
Rule of thumb: Treat ROE as a ranking tool inside one sector, not as a beauty contest across the entire market.
How to Use ROE by Industry in a Stock Screener
The cleanest use of ROE is to start with one sector, then look for the companies that earn above-average returns on equity relative to their direct peers.
Screener 1: Same-sector quality leaders
Use this when you want the strongest businesses inside one industry.
| Filter | Setting |
|---|---|
| ROE | > sector baseline |
| Net profit margin | > sector median |
| Debt-to-equity | Below sector median |
| Market cap | > $1B |
Example starting points:
- Software: ROE > 20%
- Industrials: ROE > 12%
- Banks: ROE > 11%
- Utilities: ROE > 9%
Screener 2: High-ROE value candidates inside one industry
Use this when you want to combine quality with valuation discipline.
| Filter | Setting |
|---|---|
| ROE | Above industry norm |
| P/E ratio | Below industry norm |
| Debt-to-equity | Reasonable for the sector |
| Revenue growth | Positive |
This works especially well in sectors where headline valuation multiples can hide big quality differences. Two industrial companies may both trade at 16x earnings, but the one earning a 16% ROE with moderate debt is usually a much cleaner business than the one earning 7% ROE with a stretched balance sheet.
<!-- [SCREENSHOT: ScreenerHub Studio - ROE filter pre-selected, then narrowed within one sector using debt-to-equity, net profit margin, and P/E ratio] -->
→ Try this screen in ScreenerHub: start with ROE, then compare within one industry ->
If you want a full workflow after the shortlist appears, continue with How to Find High-Quality Stocks or the strategy page Systematically Find Value Stocks.
When ROE Misleads Even Inside the Same Industry
Industry context improves ROE, but it does not solve every problem. Four situations can still make the number look better than the business really is.
1. High leverage inflates ROE
A company can shrink the equity base with debt and make ROE rise mechanically. This is especially important in banks, real estate, and capital-intensive sectors.
Check next: Debt-to-equity and ROIC.
2. Buybacks reduce equity
Aggressive buybacks can push ROE higher even if earnings quality has not improved much. This is common in consumer brands and mature technology companies.
Check next: multi-year equity trends and earnings growth.
3. Cyclical profits spike temporarily
Commodity producers, industrials, and some financials can post one great year that makes ROE look exceptional. If the cycle turns, the number can collapse.
Check next: 3-year or 5-year averages instead of one trailing period.
4. Negative equity breaks the metric
When shareholder equity turns negative, ROE becomes distorted or meaningless. At that point, net profit margin, cash flow, and leverage metrics are more useful.
Frequently Asked Questions
What is a good ROE for a stock?
A good ROE depends on the industry. For software or strong consumer brands, investors often want to see 15% to 20% or higher. For utilities or REITs, even 8% to 10% can be respectable. The right comparison set is the company's direct sector and business model, not the broad market average.
Should I compare ROE across different sectors?
Usually no. ROE is far more useful when you compare businesses with similar capital intensity and similar balance-sheet structures. Comparing a software company with a utility or a bank produces more confusion than insight.
Why do banks often have lower ROE benchmarks than software companies?
Banks operate with leverage as part of the business model, and they earn returns under very different regulatory and balance-sheet constraints. Software companies often scale with far less capital, so higher ROEs are more common. The number must be judged in the context of how the industry works.
Can ROE be too high?
Yes. A very high ROE can be excellent, but it can also be a warning sign that debt, buybacks, or unusually low equity are inflating the metric. That is why high ROE should always be paired with leverage and cash-flow checks before you treat it as proof of quality.
Related Articles
- What Is Return on Equity (ROE)? - the core definition, formula, and basic interpretation
- What Is ROIC? - the best cross-check when leverage may be inflating ROE
- What Is Debt-to-Equity? - helps you tell healthy ROE from debt-driven ROE
- How to Find High-Quality Stocks - a practical next step once you have sector-aware ROE filters