Difference between ROE (Return on Equity) and ROA (Return on Assets) – Finance | Management Notes

Difference between ROE and ROA
Finance
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Management Notes

Return on Equity is the amount of profit that a company receives with the amount of money shareholders have invested on the company.In simpler words ,it is the amount of net income returned as a percentage of shareholders equity.

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.

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 amount of money shareholders have invested on 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 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. Return on Equity can be calculated as :

ROE= Net Profit/Average Shareholder’s Equity

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.

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