The main difference between ROE & ROI is that Return on Equity (ROE) measures how efficiently your invested money is working by focusing on equity returns, while Return on Investment (ROI) assesses overall profitability, showing returns on all invested funds.
Content:
- ROE meaning
- What is ROI?
- Difference Between ROI And ROE
- Difference Between Roi And Roe- Quick Summary
- ROI vs. ROE – FAQs
ROE meaning
ROE, or Return on Equity, measures how well a company turns profits into investor returns. It indicates the connection between a company’s profit and what investors gain. Understanding Return on Equity helps assess a company’s financial health and ability to generate shareholder returns.
Return on Equity (ROE) is a crucial financial metric that indicates how efficiently a company is using its equity to generate profits. It is calculated by dividing the company’s net income by its shareholder’s equity.
Here’s a breakdown of the formula:
ROE = Net Income / Shareholder’s Equity
Let’s say you’re considering investing in Company ABC. If Company ABC reports a net income of Rupees 10,00,000 and has a shareholder’s equity of Rupees 50,00,000, its ROE would be:
ROE = (10,00,000)/(50,00,000)
= 0.20 or 20%
This means that every rupee of equity invested in Company ABC generates 20 paise of profit. A higher ROE generally indicates that a company is more efficient in using its equity to generate profits, which is often seen as favorable by investors.
What is ROI?
Return on Investment measures the profitability of an investment relative to its cost. To calculate ROI, you divide the gain from the investment by its cost, expressed as a percentage. A higher ROI indicates a better return relative to the investment.
To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.
The formula for ROI is:
Here’s a simple example:
Suppose you invest ₹50,000 in an Indian stock market fund. After one year, the value of your investment grows to ₹60,000. To calculate the ROI:
- First, find the net profit, which is the current value of your investment minus the original investment: ₹60,000 – ₹50,000 = ₹10,000.
- Next, divide this net profit by the original investment: ₹10,000 / ₹50,000 = 0.2.
- Finally, convert this figure into a percentage by multiplying by 100: 0.2 × 100 = 20%.
- So, your ROI for this investment is 20%. This means you earned a return of 20% on your original investment, a useful indicator of the investment’s profitability, especially when comparing it to other investment options in the Indian market.
Difference Between ROI And ROE
The main difference between ROI and ROE is that ROI calculates the percentage return on overall investment, while ROE focuses on the return specifically on equity investment.
| Aspect | ROI | ROE |
| Definition | Measures total return from an investment. | Measures return on the shareholder’s equity. |
| Calculation | Net Profit / Total Investment x 100 | Net Income / Shareholder’s Equity x 100 |
| Focus | Overall profitability of the investment. | Efficiency in using equity to generate profits. |
| Use | Comparing different investment options. | Assessing a company’s financial performance. |
| Example | If you invest ₹1,000 in a property and sell it for ₹1,200, your ROI is 20%. | If a company with ₹10,000 in equity earns ₹2,000, its ROE is 20%. |
Difference Between ROI And ROE – Quick Summary
- The main difference between ROE & ROI is that ROE evaluates returns on equity, while ROI assesses total profitability, considering all invested money.
- Return on Equity means how efficiently a company uses investor money to make profits. Higher ROE suggests better profit generation from investor funds.
- Return on Investment (ROI) means measuring how profitable an investment is. It shows the percentage of profit or loss compared to the initial investment.
ROI vs. ROE – FAQs
What Is The Difference Between ROI And ROE?
The main difference between ROE and ROI is what they measure in investments. ROE evaluates the efficiency of equity utilization by a company, whereas ROI assesses investment profitability irrespective of funding sources.
How do you calculate ROI and ROE?
To calculate ROI (Return on Investment), divide the net profit from an investment by the total investment cost, then multiply by 100. For ROE (Return on Equity), divide a company’s net income by its shareholders’ equity and multiply by 100.
What is a good ROE?
A “good” ROE varies by industry and economic conditions, but generally, a higher ROE compared to industry averages is favorable. It indicates efficient use of equity to generate profits, reflecting a company’s financial health and management effectiveness.
What is a good ROI ratio?
The quality of an ROI ratio hinges on various factors, such as industry norms and investment type. While a higher ROI often signals profitability, assessing risk and benchmarking against industry standards or alternatives is crucial.
What is the difference between return on capital and ROE?
The main difference between Return on Equity (ROE) and Return on Capital (ROC) is that while ROE evaluates profitability based on shareholder investment, ROC encompasses both shareholder equity and debt to assess financial performance.
What is the difference between return on assets and ROE?
The main difference between ROE (Return on Equity) and ROA (Return on Assets) is that ROE gauges profit efficiency from shareholders’ equity, while ROA evaluates overall profitability, incorporating all assets, including debt-financed ones.
