# ROE, ROA and ROIC

> ROE, ROA and ROIC show how efficiently a company turns capital into profit. Learn the formulas, the DuPont breakdown, why ROIC versus WACC matters and the pitfalls.

Source: https://learn.tradelabsai.com/fundamentals/roe-roa-and-roic/  
Track: Fundamental Analysis · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "ROE, ROA and ROIC", https://learn.tradelabsai.com/fundamentals/roe-roa-and-roic/

A company that earns $100 million is far more impressive if it used $500 million of capital than if it needed $5 billion. Return measures show how efficiently a business turns the money invested in it into profit. Return on equity (ROE), return on assets (ROA) and return on invested capital (ROIC) are three of the most important. ROIC compared with the cost of capital is often considered the best single test of whether a company creates value.

## The formulas

| Measure | Formula | What it shows |
|---|---|---|
| ROE | Net income / average shareholders' equity | Return to shareholders on their book capital |
| ROA | Net income / average total assets | Profit generated from all assets |
| ROIC | NOPAT / average invested capital | Return on all capital invested in operations |

```
NOPAT = operating income × (1 - tax rate)
invested capital = debt + equity - cash (or operating assets - operating liabilities)
```

## Worked example

**Example: Comparing returns**
A company has operating income of $250 million, a tax rate of 20%, net income of $180 million, total assets of $2.0 billion, equity of $900 million, debt of $700 million and cash of $100 million.

- ROE = 180 / 900 = 20%
- ROA = 180 / 2,000 = 9%
- NOPAT = 250 × 0.8 = $200 million
- Invested capital = 700 + 900 minus 100 = $1.5 billion
- ROIC = 200 / 1,500 ≈ 13.3%

If its WACC is 9%, the company earns about 4.3 points above its cost of capital on every dollar invested: it is creating value. See [WACC and Cost of Equity](https://learn.tradelabsai.com/fundamentals/wacc-and-cost-of-equity/).

## The DuPont breakdown

ROE can be split into three drivers:

```
ROE = (net income / revenue) × (revenue / assets) × (assets / equity)
     = net margin × asset turnover × equity multiplier
```

| Driver | Example of a high value |
|---|---|
| Net margin | Software or luxury goods |
| Asset turnover | Discount retailers that sell large volumes on thin margins |
| Equity multiplier | Banks and highly indebted companies |

Two companies with the same ROE can be very different: one through high margins, the other through heavy debt. See [Operating and Financial Leverage](https://learn.tradelabsai.com/fundamentals/operating-and-financial-leverage/).

## Why ROIC matters most

- **Value creation:** a company creates value when ROIC exceeds WACC. Growth only adds value if new investments earn more than the cost of capital.
- **Capital structure neutral:** ROIC includes debt and equity, so it is not inflated by borrowing.
- **Reinvestment and growth:** growth = reinvestment rate × ROIC. A company earning 20% ROIC and reinvesting half its NOPAT can grow about 10% a year without outside capital. See [Capital Allocation and Management](https://learn.tradelabsai.com/fundamentals/capital-allocation/).

## Typical ranges

| ROIC | Interpretation |
|---|---|
| Below WACC (often under 8%) | Destroying value on invested capital |
| 10% to 15% | Solid |
| Above 20% sustained | Often a sign of a competitive advantage. See [Competitive Advantage and Moats](https://learn.tradelabsai.com/fundamentals/competitive-advantage-and-moats/) |

## Pitfalls

- **Buybacks and negative equity** can make ROE extremely high or meaningless. See [Debt, Cash and Shareholders' Equity](https://learn.tradelabsai.com/fundamentals/shareholders-equity/).
- **Goodwill:** acquisitions add goodwill to invested capital, lowering ROIC. Analysts sometimes calculate ROIC with and without goodwill. See [Goodwill and Intangible Assets](https://learn.tradelabsai.com/fundamentals/goodwill-and-intangible-assets/).
- **Expensed intangibles:** companies that invest heavily in R&D and marketing may have understated invested capital and overstated ROIC.
- **Cyclical peaks:** returns look highest at the top of a cycle.
- **Banks:** ROA and ROE are standard; ROIC is not used for financial firms.

## Returns and investing

High and stable returns on capital are a core feature of "quality" stocks. Research on the quality factor has found that profitable companies with high returns on capital have historically delivered better risk adjusted returns than unprofitable ones. See [Quality and Profitability Factors](https://learn.tradelabsai.com/research/quality-factor/).

## Frequently asked questions

### What is the difference between ROE and ROIC?

ROE measures returns on shareholders' equity only; ROIC measures returns on all capital invested, including debt, so it is not inflated by leverage.

### What is a good ROIC?

One consistently above the company's cost of capital; sustained ROIC above about 15% to 20% often indicates a strong competitive position.

### What is the DuPont analysis?

A breakdown of ROE into net margin, asset turnover and financial leverage, showing what drives a company's return on equity.

Next, learn how to judge whether reported profits are reliable in [Earnings Quality and Cash Conversion](https://learn.tradelabsai.com/fundamentals/earnings-quality/).

## Continue learning

- Next lesson: [Earnings Quality and Cash Conversion](https://learn.tradelabsai.com/fundamentals/earnings-quality/)
- Previous lesson: [Operating and Financial Leverage](https://learn.tradelabsai.com/fundamentals/operating-and-financial-leverage/)
- Related: [Operating and Financial Leverage](https://learn.tradelabsai.com/fundamentals/operating-and-financial-leverage/): Operating leverage comes from fixed costs; financial leverage comes from debt. Learn how each magnifies profit swings, the key formulas and what they mean for risk.
- Related: [Debt, Cash and Shareholders' Equity](https://learn.tradelabsai.com/fundamentals/shareholders-equity/): Shareholders' equity is assets minus liabilities, the book value owned by shareholders. Learn its parts, how buybacks change it and why it can be negative.
- Related: [WACC and Cost of Equity](https://learn.tradelabsai.com/fundamentals/wacc-and-cost-of-equity/): WACC blends the cost of equity and the after tax cost of debt into a discount rate. Learn CAPM, beta, the equity risk premium, a worked example and common pitfalls.
- Related: [Capital Allocation and Management](https://learn.tradelabsai.com/fundamentals/capital-allocation/): Capital allocation is how management spends a company's cash on reinvestment, deals, dividends, buybacks or debt. Learn how to judge good and bad decisions.
- Related: [Competitive Advantage and Moats](https://learn.tradelabsai.com/fundamentals/competitive-advantage-and-moats/): An economic moat is a durable advantage that protects a company's profits from rivals. Learn the main sources, how to spot them in the numbers and how they erode.
- Related: [Quality and Profitability Factors](https://learn.tradelabsai.com/research/quality-factor/): The quality factor favours profitable, stable, conservatively financed companies. Learn how quality is measured, the evidence and how it pairs with value.