Difference between ROE and ROA | Finance | Difference between ROE and ROA | ROA Vs ROE | BBA |Management Notes
What does Roe mean in finance?
Return on Equity is the amount of profit that a company receives with the number of money shareholders have invested in the company. In simpler words, it is the amount of net income returned as a percentage of shareholders’ equity.
What does ROA mean?
Return on Assets is the amount of profit a company earns in relation to its total resources or total assets. Return on assets (ROA) shows how efficiently a company uses its assets in order to generate revenue.
ROA Vs ROE
| S.No. | Return on Equity (ROE) | Return on Assets (ROA) |
| 1. | Return on Equity is the amount of profit that a company receives with the number of money shareholders have invested in the company. | Return on Assets is the amount of profit a company earns in relation to its total resources or total assets. |
| 2. | The major factor that separates ROE and ROA is financial leverage ie; Debt is not included in ROE or we can say that ROE does not contain any kind of debt. | The major factor that separates ROE and ROA is financial leverage ie; Debt is included in ROA which can be clearly seen in the balance sheet(Total Assets = Liabilities + Shareholder’s Equity) |
| 3. | ROE measures the efficiency of capital or financial management. | ROA measures the efficiency of operating management. |
| 4. | Preferred dividends are deducted from the numerator when calculating ROE. | Preferred dividends are not deducted from the numerator when calculating ROA. |
| 5. |
How do you calculate ROE?Return on Equity can be calculated as ROE= Net Profit/Average Shareholder’s Equity |
What is ROA formula?Return on Assets can be calculated as : ROA= Net Profit/Average Total Assets |
Although ROA and ROE are different things but together they provide a clear picture of management’s effectiveness. If ROA is sound and debt levels are reasonable, a strong ROE is a solid signal that managers are doing a good job of generating returns from shareholders’ investments.
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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