ROA vs. ROE: Differences, Formulas, and Uses in Financial Analysis

ROA vs ROE: Two Ways to View Return-on-Investment (ROI)

ROA (Return on Assets) and ROE (Return on Equity) are two distinct financial ratios that measure a company’s performance from different angles. While both use net income as their starting point, they provide financial analysts with separate perspectives: 

• ROA evaluates how effectively a company uses its assets to generate profit.
• ROE focuses on returns delivered to shareholders.

How ROA and ROE Work and What They Measure

Both ROA and ROE use the same starting point: net income, the company’s bottom-line profit reported on the income statement. 

But each ratio compares that profit to a different figure on the balance sheet — total assets for ROA and shareholders’ equity for ROE — giving you two distinct perspectives in evaluating returns.

Return on Assets (ROA)

ROA measures how efficiently a company uses its total assets to generate profit. Financial analysts typically use ROA to assess performance over time or compare companies within the same industry. 

When comparing ROAs across different companies, consider the scale of their businesses and the nature of their operations. For example, the average ROA for retailers tends to be lower than less capital-intensive sectors, such as SaaS and subscription-based companies.

To calculate a company’s ROA, use this formula:

ROA = Net Income ÷ Total Assets 

ROA Example

Let’s compare two fictional companies in the same industry: Bluehill Retail and Maple & Co., both mid-sized general merchandise retailers.

• Bluehill Retail reports net income of $12 million and total assets of $150 million, resulting in: ROA = $12mm ÷ $150mm = 8%
• Maple & Co. reports net income of $10 million and total assets of $100 million, resulting in: ROA = $10mm ÷ $100mm = 10%

Both companies are profitable, but Maple & Co. is generating more profit per dollar of assets, suggesting it uses its resources more efficiently. You might conclude that Maple & Co. has tighter asset management — perhaps it carries less excess inventory or turns over fixed assets more effectively. But you want to calculate ROE before making any conclusions.

Return on Equity (ROE)

ROE measures how effectively a company utilizes shareholders’ capital to generate profits. A higher ROE indicates better strong profitability and greater return on shareholders’ investment.

To calculate a company’s ROE, use this formula:

ROE = Net Income ÷ Shareholders’ Equity

ROE Example

Now let’s look at how those profits translate into shareholder returns.

• Bluehill Retail is financed with $90 million in equity and $60 million in debt, giving us: ROE = $12mm ÷ $90mm = 13.3%
• Maple & Co. is financed with $80 million in equity and $20 million in debt, giving us: ROE = $10mm ÷ $80mm = 12.5%

Here’s where it gets interesting: even though Maple & Co. has a higher ROA, Bluehill delivers a higher ROE. Bluehill’s has higher debt relative to equity. This debt boosts its ROE, i.e., shareholder returns, by reducing the amount of equity required — although higher debt also increases financial risk.

ROA vs ROE: Comparing Two Retail Companies

Analyst Takeaway

• While Maple & Co. demonstrates superior efficiency in using its assets to create value, Bluehill’s strategic use of leverage amplifies returns for its investors.
• This contrast reveals a classic financial trade-off: Maple’s conservative approach may offer more stability during economic downturns, while Bluehill’s leverage strategy could outperform in growth periods.
• Investors should consider which approach aligns with their risk tolerance and market outlook when evaluating these businesses.

While debt isn’t part of the ROE formula, it can still influence the outcome. The difference highlights why both ratios matter. ROA helps you evaluate overall performance across the business. ROE helps you assess how that performance translates into value for equity investors.

Key Differences Between ROA and ROE

Understanding what each ratio compares profit to — assets versus equity — reveals important distinctions in how they should be interpreted and applied in financial analysis:

In Practice

• Use ROA when comparing companies with different debt levels or when evaluating management’s efficiency in deploying all resources.
• Use ROE when analyzing investment potential from a shareholder’s perspective or when comparing companies with similar capital structures.

These complementary metrics work best when analyzed together, providing a more comprehensive view of a company’s financial health and performance strategy.

Mastering ROA vs. ROE: Next Steps Toward World-Class Financial Analysis

Understanding the difference between ROA and ROE is just one piece of the financial analysis puzzle. World-class financial analysts connect the dots between performance metrics, business strategy, and investor outcomes. That kind of insight takes practice, structure, and the right tools.

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Additional Resources

Financial Ratios Definitive Guide

Limitations of Ratio Analysis

Financial Modeling Best Practices

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See all Financial Modeling resources