Course · Act III: Reading the Numbers · Chapter 14
ROE, ROA and ROIC
Return on equity, return on assets and return on invested capital, and why only returns above the cost of capital create value.
Key terms
- ROE
- Return on equity: net income ÷ shareholders’ equity.
- ROA
- Return on assets: net income ÷ total assets.
- ROIC
- Return on invested capital: after-tax operating profit ÷ (debt + equity). Not inflated by leverage.
- Cost of capital
- The return investors and lenders demand. ROIC above it creates value.
“Returns: ROE, ROA, ROIC” is part of the full course: 5 puzzles on roe, roa and roic, with a story that carries through all five acts. Try this act’s free chapter, “Margins”, first.