What Businesses Have the Highest Return on Equity?
Return on equity has been called the ultimate capitalist ratio because it boils a company's finances down to a single number that tells you how well the company generates profit for its owners. In general, a higher return is better, but some industries' return is higher than others.
To calculate your company's return on equity, start with its net income -- its profit. Divide that by the owners' equity in the company or, if it's a corporation, the stockholders' equity. Equity is the value of the company's assets minus the value of its liabilities. Say your company has $100,000 in net income and $250,000 in equity. Return on equity is 0.40, or 40 percent. For each $1 in owners' equity, the company generated 40 cents in profit.
The Census Bureau reports that there are about 28 million businesses in the United States, the vast majority of them small businesses. No one source tracks the ROE of every company. However, Aswath Damodaran, a professor of finance at New York University's Stern School of Business, regularly publishes an analysis of the ROE figures of more than 6,100 companies in about 100 different industry sectors. As of January 2013, they had an average return on equity of 12.89 percent. Historical ROEs of U.S. companies run about 10 percent to 12 percent.
According to Damodaran's figures, tobacco companies had the highest ROE of any sector by far: nearly 66 percent. The next-highest sector, computer hardware, was a little over 32 percent. Rounding out the top 10 were makers of toiletries and cosmetics (32 percent); restaurant companies (31.7 percent); heavy truck and equipment manufacturers (27.3 percent); metals and mining companies (26.7 percent); computer software firms (25 percent); aerospace and defense contractors (24 percent); clothing retailers (24 percent); and makers of basic chemicals (23.62 percent).
Higher-performing sectors that might be of particular interest to small-business people include three in the top 10: restaurants, software producers and clothing retailers. Other industries with above-average ROE in Damodaran's data include: information technology services (13th place, 22.7 percent); automotive retailers, including car dealers and auto parts stores (15th, 21.1 percent); retailers of "hard" goods, such as appliances, housewares, electronics and other non-clothing durable goods (19th, 18.4 percent); lumberyards, home centers and building supply retailers (22nd, 18.1 percent); department stores (24th, 18 percent); packaging and container manufacturing (29th, 17.2 percent); wholesale and retail grocers (35th, 16.3 percent); information services (40th, 15.8 percent); office equipment and supplies (44th, 14.2 percent); real estate investment (50th, 13.3 percent); and pharmacy services, including drugstores (51st, 13.25 percent).