What Is ROE?
ROE = Net Income / Shareholders' Equity × 100. It shows how many dollars of profit are generated for every $100 of shareholders' equity.
Example: Net income $50M, equity $250M → ROE = 20%. Shareholders earned $20 for every $100 invested.
High ROE generally signals strong management and competitive advantage. Warren Buffett targets ROE > 15% consistently. Beware: ROE can be artificially inflated by heavy debt (leverage), which increases equity returns but also financial risk.
What Is ROA?
ROA = Net Income / Total Assets × 100. It measures how efficiently a company uses all its assets (funded by both equity and debt) to generate profit.
ROA is independent of capital structure, making it cleaner for comparing operational efficiency across companies with different debt levels.
How to Interpret ROE vs ROA
ROE > ROA: The company uses financial leverage. Leverage amplifies returns but also amplifies risk.
ROE ≈ ROA: The company has little or no debt.
Always compare within the same sector: Banks show low ROA but high ROE by design. Technology companies can achieve high scores on both metrics.