ROE vs ROA

ROE is a measure of financial performance which is calculated by dividing the net income by total equity, while ROA is a type of return on investment ratio which indicates the profitability in comparison to the total assets and determines how well a company is performing; it is calculated by dividing the net profit with total assets.

Two crucial parameters for analyzing a business are the Interpet ROE and return on assets Interpet ROE and return on assets (ROA).

Return on equity and Return on assets are known as profitability ratios, as they indicate the level of profit generated by a business.

Return on equity measures how much a business earns concerning the amount of equity put in the business. Return on equity is a ratio calculated with net income as the numerator and total equity as the denominator.

• Net income is an income statement item, and total equity comes from the balance sheet; that’s why the average of equity is considered for calculating the ratio.
• A higher ratio signifies that the business is doing well as it can generate a high amount of profit, given a particular level of investments in the form of equity.
• Return on equity is also popularly calculated using the DuPont formula. DuPont analysis is the combination of three ratios, which helps identify which parameter results in the increase or decrease of ROE.

Return on assets is a measure to gauge how much profit the business generates with the number of total assets invested in the business. This ratio is measured with net income as a numerator and total assets as a denominator.

• In another way, this measures how much profit the business generates with the funds invested by the equity shareholder's preferred shareholders and total debt investment.
• Total assets are funded by both equity and debt holders. All these sets of investors provide the funds required for the total assets. It is necessary to add back interest expenses in the net income, which seats in the ratio's numerator.
• In the case of ROA, as in the case of ROE, the numerator is an income statement item, and the denominator is the balance sheet item. That’s why the average of the total asset is taken in the denominator.

The followings are the key differences:

• With the help of ROE, we can measure how much a business is earning concerning the amount of equity put in the business. In contrast, ROA tells us how much profit is being generated by the business with the total amount of assets invested in the business.
• While calculating ROE, the net income is the numerator, whereas the total equity is the denominator. In a calculation of ROA, net income is the numerator, and the total assets are the denominator.
• Another way of calculating ROE is DuPont Analysis, but no such measures are available to calculate ROA.
• For the calculation of ROE, we only consider equity investors, but for the calculation of ROA, equity shareholders preferred shareholders, and total debt investment, all are taken into account.
• While calculating ROE, no adjustment in the numerator is required since only equity is considered the denominator. For calculating ROA, it is essential to add back interest expenses to the numerator since the total asset is funded by both equity and debt holders.

Return on equity and return on assets are known as profitability ratios, as they indicate the level of profit generated by a business. While deciding and concluding about a company's financial health and performance, it is essential to consider both ROA and ROE since both these ratios are very important.

Combining the results helps us get a fair idea about the effectiveness of the company management of any company.

This article has been a guide to ROE vs. ROA. Here we also discuss the top differences between ROE and ROA and infographics and a comparison table. You may also have a look at the following articles –

• Shares vs. Debentures
• Calculate EBITDA
• Return on Average Equity
• Return on Equity Formula