Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Profitability Ratios
- Profitability Ratios Formula
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
ROE vs ROA Differences
Return on equity and Return on assets these ratios are known as profitability ratios, as they indicate the level of profit generated by a business. In this article, we look at the differences between ROE vs ROA.
What is ROE?
Return on equity measures how much a business earns with respect to the amount of equity put in the business. Return on equity is a ratio which is 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 for calculating the ratio the average of equity is considered.
- A higher ratio signifies that the business is doing really well as they are able to 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 DuPont analysis. DuPont analysis is the combination of three ratios which helps in identifying which parameter is resulting in the increase or decrease of ROE.
What is ROA?
Return on assets is a measure to gauge how much profit is generated by the business 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 is generated by the business with the funds invested by the equity shareholders preferred shareholders and also total debt investment.
- As the funds required for the total assets is provided by all these set of investors. Total asset is funded by both equity and debt holders it is required to add back interest expenses in the net income which seats in the numerator of the ratio.
- In case of ROA also as in 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.
ROE vs ROA Infographics
Here we provide you with the top 5 difference between ROE vs ROA
ROE vs ROA Key Differences
The followings are the key differences between ROE vs ROA :
- With the help of ROE, we can measure how much a business is earning in respect to the amount of equity which is put in the business whereas 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 for calculation of ROA.
- For calculation of ROE we only consider equity investors but for calculation of ROA equity shareholders, preferred shareholders and total debt investment all are taken into account.
- While making the calculation for ROE no adjustment in the numerator is required to be done since only equity is considered as the denominator. For calculation of ROA, it is essential to add back interest expenses to the numerator since total asset is funded by both equity and debt holders.
ROE vs ROA Head to Head Differences
Let’s now look at the head to head difference between ROE vs ROA
|Basis||Return on Equity(ROE)||Return on Assets(ROA)|
|Introduction||Return on equity measures how much a business earns with respect to the amount of equity put in the business.||Return on assets is a measure to gauge how much profit is generated by the business with the number of total assets invested in the business.|
|Difference in denominator||Return on equity is a ratio which is calculated with net income as the numerator and total equity as the denominator.||This ratio is measured with net income as a numerator and total assets as a denominator.|
|DU Pont Analysis||ROE is also calculated using du Pont analysis which helps to identify whether ROE has increased due net profit margin or leverage or is it due to an increase in asset turnover||No such measures applicable for calculation of ROA|
|Investors||Only equity investors are considered for the calculation of ROE||ROA measures how much profit is generated by the business with the funds invested by the equity shareholders, preferred shareholders and also total debt investment. As the funds required for the total assets is provided by all these set of investors.|
|Adjustment||For the calculation of ROE, it is not required to adjust the numerator of the ratio. As the denominator is only equity not the combination of both debt and equity. As debt is not involved interest need not be added back in the numerator.||As total asset is funded by both equity and debt holders it is required to add back interest expenses in the net income which seats in the numerator of the ratio.|
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 very much important to consider both ROA and ROE, since both these ratios are very much important.
Combining the results help us get a proper idea about the effectiveness of the company management of any company.
This has been a guide to ROE and ROA Here we also discuss the top differences between ROE vs ROA along with infographics and comparison table. You may also have a look at the following articles –