Return on equity (ROE) and return on assets (ROA) are two of the most important measures for evaluating how effectively a companyâ€™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 firmâ€™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) Ã— (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 â€“ Liabilities = Shareholdersâ€™ equity.
A higher proportion of assets compared to shareholdersâ€™ equity demonstrates the extent to which debt (leverage) is used in a companyâ€™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.

Should I expect growth or income from buying stock in the consumer packaged goods ...
Find out how annual returns are expressed in financial statements. How do fundamental investors measure annual returns? What ... Read Answer >> 
What is the difference between a primary and a secondary market?
Examine the return on assets ratio as it relates to the insurance industry, and learn what the industry average is for return ... Read 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 Answer >> 
What level of return on equity is common for a company in the banking sector?
Discover what the average return on equity (ROE) ratio is for companies in the banking industry, and understand the significance ... Read Answer >> 
What is the formula for calculating return on assets (ROA)?
Learn about the calculation and interpretation of the return on assets formula and how it is used to analyze a company's ... Read Answer >> 
What is the average return on equity for a company in the financial services sector?
Learn the importance of calculating a company's return on equity and what businesses in the financial services industry average ... Read Answer >>

Investing
What Are The Main Differences Between Return On Equity (ROE) and Return On Assets?
Return on equity and return on assets are important measures for evaluating how well a company manages the capital its shareholders entrust to it. 
Investing
ROA and ROE Give Clear Picture Of Corporate Health
ROE indicates if a companyâ€™s value is growing at an acceptable rate. ROA reveals how much profit a company earns for every dollar of assets. 
Personal Finance
Use ROA To Gauge A Company's Profits
Do you rely too heavily on ROE? Consider using return on assets for a more complete picture. 
Investing
How Return On Equity Can Help You Find Profitable Stocks
It pays to invest in companies that generate profits more efficiently than their rivals. This is where ROE comes in. 
Investing
Decoding DuPont Analysis
Get a deeper understanding of ROE with these threestep and fivestep calculations. 
Managing Wealth
Understanding the DuPont Analysis
DuPont analysis measures assets at their gross book value, rather than at net book value, in order to produce a higher return on equity (ROE). 
Markets
Analyzing Procter & Gamble's Return on Equity (ROE) (PG)
Find out how Procter & Gamble's return on equity (ROE) has varied over time, how the company's ROE compares with its peers and what its ROE is projected to be. 
Managing Wealth
Analyzing BP's Return on Equity (ROE)
Examine the return on equity (ROE) for British Petroleum, the slumping international energy company that seems to be falling behind its competitors. 
Markets
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. 
Markets
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 Assets  ROA
An indicator of how profitable a company is relative to its total ... 
Return On Equity  ROE
The amount of net income returned as a percentage of shareholders ... 
DuPont Analysis
A method of performance measurement that was started by the DuPont ... 
Rights of Accumulation  ROA
A right that allows a shareholder to receive reduced sales charges ... 
Cash Return On Assets Ratio
A ratio used to compare a businesses performance among other ... 
Return
The gain or loss of a security in a particular period. The return ...