ROE Vs ROI

Strategic Cost Management

 Return On Equity
• Return on Equity is calculates the amount of profit a
company earned in comparison to the total amount
of shareholder's equity found on the balance sheet.

• ROE is a useful tool in comparing the profitability of

a company to the other firms in the same industry.

• Return on Equity is calculated by-

Profit After Tax
Net Worth (Equity)
 Return On Investment
• Return on Capital on the other hand is a measure
of how effectively a company uses its money
(whether borrowed or owned), invested in its
operations.

• It is a ratio that indicates the efficiency and

profitability of a company’s capital investments.

• Return on Capital is calculated by –

EBIT
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 Return On Equity
• ROE is return on equity. It tells you how much money the
company made for every dollar of equity they have.
(equity=Assets-Liabilities). Note that a company that borrows
money and then invests that money to increase profitability
will have an above average ROE.

• ROE measures a company's profit as a percentage of the

combined total worth of all ownership interests in the
company. For example, if a company's profit equals $2 million
for a period, and the total value of the shareholders' equity
interests in the company equals $100 million, the return on
equity would equal 2% ($2 million divided by $100 million).
 Return On Investment
• ROI means return on investment. While similar to the return on equity,
the difference is that if a company borrows money, and spends that to
increase earnings, the borrowed money is part of what's considered the
"investment".

• Return on capital essentially is the same formula as return on equity, but

with the addition of one component. Return on capital, in addition to
using the value of ownership interests in a company, also includes the
total value of debts owed by the company in the form of loans and
bonds.

• For example, if the company in the first example also owed $100 million
in debts, the return on capital would drop to 1% ($2 million divided by
the sum of $100 million in equity and $100 million in debts).