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.|
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.