Return on Equity and Return on AssetsROE
Return on equity (ROE) is net income divided by shareholders’ equity; return on assets (ROA) is net income divided by total assets. ROE can be pushed up by borrowing, so it is best read alongside debt levels.
Two companies can earn the same profit and still be very different businesses. ROE and ROA ask how much profit a company squeezes out of what it owns and out of what its shareholders put in — and the gap between the two tells you how much borrowing is doing the work.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- ROE and ROA, Return on equity, Return on assets
- Updated
ROE and ROA in plain words
ROE takes a company's yearly net income and divides it by shareholders' equity, shown as a percentage.1 It answers: how much profit per dollar owned by shareholders?
ROA divides net income by total assets instead.2 It answers: how much profit per dollar of everything the company owns?3
The two are linked: ROE depends on ROA and on how much financial Leverage the company uses.1 Read both with Earnings and debt in mind.
How to calculate and read ROE and ROA
Find net income
Take net income from the income statement; this is the numerator for both ratios.1
Find total assets
Take total assets from the balance sheet; many analysts use the average of the beginning and ending figures.3
Calculate ROA
Divide net income by total assets.2
Calculate ROE
Divide net income by shareholders' equity and express it as a percentage.1
Compare ROE with ROA
A big gap means debt is doing much of the work: more debt means less equity, which lifts ROE.4
Compare with peers
Compare the result with the industry average rather than reading it in isolation.1
Worked examples
Example 1 — Basic ROA
ROA = 20%A hypothetical company earns $10 million of net income and has $50 million of total assets.
| ROA | $10m ÷ $50m = 20% |
| Profit per $1 of assets | $0.20 |
ROA is net income divided by total assets, so this company generates about $0.20 of net income for every dollar of assets.2
Example 2 — Same business, more debt
Higher ROE from leverage, not better operationsCompany A: $100m assets, $80m equity. Company B: $100m assets, $40m equity (more debt). Both earn $8m.
| ROA for both | $8m ÷ $100m = 8% |
| ROE for A | $8m ÷ $80m = 10% |
| ROE for B | $8m ÷ $40m = 20% |
Same assets and profit, but B's ROE is double. The more debt a company raises, the less equity it has, which pushes ROE up.4
Example 3 — Buyback effect
ROE up 3 points with no extra profitA company earns $12m on $100m equity, then buys back $20m of shares. Profit stays the same.
| ROE before | $12m ÷ $100m = 12% |
| ROE after | $12m ÷ $80m = 15% |
Profit did not change. Share buybacks can reduce shareholders' equity, and the smaller denominator can raise ROE artificially.4
ROE vs ROA
| Aspect | ROE | ROA |
|---|---|---|
| Denominator | Shareholders' equity | Total assets |
| Question answered | Profit per dollar of shareholder money | Profit per dollar of assets |
| Effect of more debt | Tends to rise | Not directly boosted |
| Best used for | Shareholder returns | Operating efficiency |
How investors use ROE and ROA
Screening for quality
Looking for companies that earn steadily high returns over many years — part of Fundamental Analysis.
Spotting leverage
A high ROE with a low ROA points to heavy borrowing; check the balance sheet.
Peer comparison
Comparing banks with banks or retailers with retailers, since asset needs differ by industry.
Tracking trends
Watching whether returns improve or fade year over year alongside Earnings per Share.
Advantages and disadvantages
Advantages
- Simple to calculate from public financial statements.
- Shows how efficiently capital is used.
- Read together, they reveal the role of debt.
Disadvantages
- ROE can be inflated by debt or buybacks.
- Negative or tiny equity makes ROE meaningless.
- Accounting choices change both ratios.
- Not comparable across very different industries.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Praising high ROE blindly
Ignoring that debt or buybacks may be driving it.
Comparing across industries
Setting an asset-heavy utility against a software firm.
Using one year only
Missing that a single strong year may be a one-off.
Ignoring negative equity
Reading a huge or negative ROE as meaningful.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- ROE = net income ÷ shareholders' equity.
- ROA = net income ÷ total assets.
- Debt and buybacks can push ROE up.
- Compare against peers in the same industry.
- Read ROE and ROA together, never alone.
Frequently asked questions
What is a good ROE?
Why is ROA usually lower than ROE?
Can ROE be negative?
Further learning
- Fundamental Analysis
The wider toolkit these ratios belong to.
- Earnings
Where net income comes from.
- Leverage
Why debt magnifies returns.
- Price-to-Earnings Ratio
Another way to judge profit against price.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Return on Equity (ROE) (opens in a new tab) Checked .
- Corporate Finance Institute. Return on Assets (ROA) (opens in a new tab) Checked .
- Wall Street Prep. Return on Assets (ROA) | Formula + Calculator (opens in a new tab) Checked .
- Wall Street Prep. Return on Equity (ROE) | Formula + Calculator (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.