Return on Equity & Capital
Return on equity and return on invested capital show how much profit a company squeezes out of the money invested in it. They help separate truly great businesses from merely big ones. Here is what they measure and the traps to avoid.
Three return measures
| Measure | Formula | What it asks |
|---|---|---|
| Return on equity (ROE) | Net income ÷ shareholders’ equity | Profit per dollar owners have in the business |
| Return on assets (ROA) | Net income ÷ total assets | Profit per dollar of everything the company owns |
| Return on invested capital (ROIC) | After-tax operating profit ÷ (debt + equity) | Profit per dollar from all investors |
Higher is better, as long as it is not inflated by debt or tiny equity.
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