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The formula of ROE is Net Income / Shareholders' Equity. If a company has a high debt / asset ratio, the Shareholders' Equity would be a small value thus results in a high ROE.

So a company with a high ROE value may have be unhealthy, how should I treat the ROE when I analyze the financial statements?

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how should I treat the ROE when I analyze the financial statements?

Critically.

No one metric can be used in a vacuum. One tenet of fundamental analysis is, once you find an unusual metric, to better understand the reason for the unusual metric. As you pointed out, if a company has very little (or even negative) equity, ROE becomes meaningless. You then need to look at other metrics (ROA? Net Margin? Earnings growth?) to evaluate the company. Having little or no equity does not necessarily mean a company is unhealthy - in fact it's not unusual for young companies in a growth industry.

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    The fact that there are no shortcuts is why so many of us decline to even try investing in individual companies (unless we are particularly attached to to them) and go with index funds instead. Determining which companies will win is hard. But the market as a whole trends upward, so investing in a highly diversified mix will tend to do likewise. It isn't exciting, it just works.
    – keshlam
    May 19 at 15:01

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