Return on equity (ROE) and return on assets (ROA) are two of the most important measures for evaluating how effectively a company’s management team is managing the capital that shareholders entrust to it. Below is an overview of the main differences between ROE and ROA and how they are related.
Understand ROE and ROA through the DuPont Identity
In a nutshell, ROE is ROA when adding financial leverage to the mix in a firm’s capital structure. The DuPont identity, a popular formula for dividing ROE into its core components, best explains the relationship between both measures of management effectiveness.
ROE = (net income) / (total assets) × (total assets) / (shareholders' equity)
The first half of the equation (net income divided by total assets) is the definition of ROA, which measures how efficiently management is using its total assets (as reported on the balance sheet) to generate profits (as measured by net income on the income statement).
The second half of the equation is known as financial leverage, which is also known as the equity multiplier. The primary balance sheet equation is:
Assets – Liabilities = Shareholders’ equity.
A higher proportion of assets compared to shareholders’ equity demonstrates the extent to which debt (leverage) is used in a company’s capital structure.
An Example
ROE and ROA are important components in banking for measuring corporate performance. Return on equity (ROE) helps investors gauge how their investments are generating income, while return on assets (ROA) helps investors measure how management is using its assets or resources to generate more income
In 2013, banking giant Bank of America Corp (BAC) reported an ROA level of 0.50%. Its financial leverage was 9.60. Using both equated to an ROE of 4.8%. This is a pretty low level. For banks to cover their cost of capital, ROE levels should be closer to 10%. Prior to the financial crisis, B of A reported ROE levels closer to 13% and ROA levels closer to 1%.
The Bottom Line
ROE and ROA are different measures of management effectiveness, but the DuPont identity shows how closely related they are.
At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Are companies with a negative return on equity (ROE) always a bad investment?
Companies that report losses are more difficult to value than those that report consistent profits. Any metric that uses ... Read Full Answer >> 
What items are considered liquid assets?
A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >> 
What is the formula for calculating EBITDA?
When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >> 
What is the formula for calculating the debttoequity ratio?
Expressed as a percentage, the debttoequity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >> 
How do I calculate the P/E ratio of a company?
The priceearnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >> 
How do you calculate return on equity (ROE)?
Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>

Fundamental Analysis
Decoding DuPont Analysis
Get a deeper understanding of ROE with these threestep and fivestep calculations. 
Stock Analysis
Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)
Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it. 
Economics
Understanding CostVolume Profit Analysis
Business managers use costvolume profit analysis to gauge the profitability of their company’s products or services. 
Fundamental Analysis
5 MustHave Metrics For Value Investors
Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know. 
Stock Analysis
Analyzing Yelp's Return on Equity (ROE) (YELP)
Learn about Yelp's return on equity (ROE) and see how it compares to industry peers. See how net profit margin, asset turnover and financial leverage impact ROE. 
Stock Analysis
Analyzing Southwest's Return on Equity (ROE) (LUV)
Find out how Southwest's net margin, asset turnover and financial leverage impact return on equity (ROE). How does its ROE compare to peers and historical results? 
Stock Analysis
Analyzing Baidu's Return on Equity (ROE) (BIDU)
Find out how Baidu's return on equity (ROE) compares to industry peers and historical results. See how DuPont analysis treats net margin, asset turnover and leverage. 
Stock Analysis
Analyzing Altria's Return on Equity (ROE) (MO)
Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE. 
Stock Analysis
Analyzing UPS's Return on Equity (ROE) (UPS)
Learn about UPS's return on equity (ROE), an important metric for investors. It is useful to compare the historical ROE and in relation to peers. 
Stock Analysis
Analyzing Google's Return on Equity (ROE) (GOOGL)
Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?

Return On Equity  ROE
The amount of net income returned as a percentage of shareholders ... 
DuPont Identity
An expression that breaks return on equity (ROE) down into three ... 
DuPont Analysis
A method of performance measurement that was started by the DuPont ... 
ShortTerm Debt
An account shown in the current liabilities portion of a company's ... 
IRR Rule
A measure for evaluating whether to proceed with a project or ... 
Profit and Loss Statement (P&L)
A financial statement that summarizes the revenues, costs and ...