What Are ROE and ROA? Two Metrics That Measure Company Efficiency
ROE measures return on equity, ROA measures return on assets. We explain how to calculate them, their meaning, the difference between the two, and how to use them to evaluate companies when picking stocks.
How efficiently does a company use its money?
When picking stocks, an important question is: how efficiently does this company generate profit from the capital and assets it has? Two metrics answer this: ROE and ROA — complementing P/E and EPS in your fundamental analysis toolkit.
ROE — Return on Equity
ROE measures the profit a company generates per unit of shareholders'' equity (shareholders'' money):
ROE = Net profit / Shareholders'' equity × 100%
Example: an ROE of 20% means for every $100 of shareholder capital, the company generates $20 of profit per year.
A high ROE usually shows the company uses shareholder capital efficiently. This is a metric investors care about a lot because it reflects "how well your money (as a shareholder) earns."
ROA — Return on Assets
ROA measures profit per unit of total assets (including both equity and debt):
ROA = Net profit / Total assets × 100%
ROA tells you how efficiently the company uses all its assets (regardless of where the money came from) to generate profit.
The core difference: the role of debt
The key difference between ROE and ROA lies in leverage (debt):
- ROE counts only shareholder equity.
- ROA counts all assets (equity + debt).
A company with a lot of debt can have a high ROE but low ROA — because debt amplifies the return on shareholder equity, while total assets are large. A big gap between ROE and ROA usually signals heavy use of debt leverage — something to examine carefully because debt increases risk.
| ROE | ROA | |
|---|---|---|
| Denominator | Shareholders'' equity | Total assets |
| Reflects | Efficiency of using shareholder capital | Efficiency of using all assets |
| Effect of debt | Debt raises ROE | Not inflated by debt |
How to use ROE and ROA when picking stocks
- Look at both together: high ROE and also high ROA is a good sign — real efficiency, not over-reliance on debt.
- Compare within the same industry: "good" ROE/ROA levels differ by industry; compare a company with peers in its field.
- Look at the multi-year trend: ROE/ROA that is stable or improving over time is better than one outlier year.
- Be wary of unusually high ROE: if ROE is very high but ROA is low, check the debt level — the company may be using large leverage.
Remember: ROE and ROA are only part of the picture. Combine them with an overall analysis of the company (reading financial statements) rather than looking at a single metric.
Conclusion
ROE measures the efficiency of using shareholder capital; ROA measures the efficiency of using all assets. The difference between them reveals how much a company relies on debt. Use both together, compare within the industry and over multi-year trends, to assess whether a company truly earns money efficiently.
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