Return ratios: ROE, ROA and ROIC
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
8 min read · updated October 14, 2026
A company made $90 of profit last year. Is that good? You can't tell. $90 on $400 of capital is a great business. $90 on $10,000 is a savings account. A return ratio fixes that by dividing profit by the capital it took to earn it.
There are three that matter, and they answer three different questions. The trick in an interview is not reciting the formulas. It is knowing whose return each one measures, and why the answers come out different for the same company.
Three ratios, three questions
Every return ratio is a profit number over a capital number. The rule that keeps you out of trouble: the numerator and the denominator have to belong to the same people.
| Ratio | Formula | Question it answers |
|---|---|---|
| ROE | Net income / Shareholders' equity | What do the owners earn on their money? |
| ROA | Net income / Total assets | How productive is the whole asset base? |
| ROIC | NOPAT / (Debt + Equity) | What does the business earn on all the capital invested in it? |
Return on equity (ROE) uses net income, the profit left after lenders are paid, over shareholders' equity, the owners' capital. Both halves belong to shareholders. Clean match.
Return on invested capital (ROIC) uses NOPAT, net operating profit after tax, which is EBIT times one minus the tax rate. That is the profit the business would earn with no debt at all. Over debt plus equity, all the capital that funds the operations. Again both halves belong to everyone who funded the business, so the match is clean. Many people subtract excess cash from invested capital, since cash is not doing operating work.
Return on assets (ROA) is the slightly awkward one. Net income is after interest, so it belongs to shareholders, but total assets are funded by everyone. Some analysts add after-tax interest back to the numerator to fix the mismatch. Interviewers usually accept the simple version, but knowing about the mismatch earns you a point.
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Frequently asked
- What is the difference between ROE, ROA and ROIC?
- They divide a measure of profit by a measure of capital, and the pairing is the whole point. ROE is net income over shareholders' equity: the return to the owners. ROA is net income over total assets: how hard the asset base works. ROIC is after-tax operating profit (NOPAT) over the debt and equity invested in the business: the return on all the capital, before financing choices. ROIC is the cleanest read on business quality.
- Why is ROE usually higher than ROA?
- Because of leverage. Assets are funded by debt and equity, so equity is smaller than assets. If the business earns more on its capital than the after-tax cost of its debt, the extra return goes to the shareholders, and their return rises above the return on the whole asset base. The same leverage pushes ROE down faster when returns fall below the cost of debt.
- What is the DuPont analysis?
- It splits ROE into three ratios multiplied together: net margin (net income over sales), asset turnover (sales over assets) and the equity multiplier (assets over equity). The first two multiply to ROA. The third is leverage. It tells you whether a high ROE comes from pricing power, efficient use of assets, or simply a lot of debt.
- What is the difference between the current ratio and the quick ratio?
- The current ratio is current assets divided by current liabilities. The quick ratio keeps only the assets that turn into cash fast, cash, marketable securities and receivables, and drops inventory and prepaid expenses. A company with a lot of slow inventory can look fine on the current ratio and weak on the quick ratio.
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