Return on equity and assets: formulas for ROE, ROA and ROI

Return on equity and return on assets express profit as a percentage of the capital used to generate it. Where profit is an absolute amount, these ratios make performance comparable: does a euro of capital earn more in this business than elsewhere? Controllers rely on three core measures: return on equity (ROE), return on assets (ROA) and return on investment (ROI).

The key profitability formulas

• ROE = (net profit / average equity) × 100
• ROA = (operating result / average total assets) × 100
• ROI = (gain from investment − cost of investment) / cost of investment × 100
• Net profit margin = (net profit / revenue) × 100

For ROE and ROA, use average capital (opening plus closing balance divided by two). That avoids distortion from a large movement late in the year.

Worked example

A company reports a net profit of €240,000 on average equity of €1,200,000, and an operating result of €400,000 on average total assets of €4,000,000.

Measure	Calculation	Result
ROE	240,000 / 1,200,000	20%
ROA	400,000 / 4,000,000	10%

ROE exceeds ROA here because of financial leverage: as long as ROA is higher than the interest cost on debt, borrowing lifts the return for shareholders.

ROE versus ROA

ROA measures how well the company makes its assets work, regardless of financing. ROE measures what is left for the shareholder and is therefore shaped by the capital structure. Always read them together: a high ROE combined with a low solvency ratio is mostly the result of debt, not of operational quality.

What is a good return on equity?

An ROE of roughly 10% to 15% is considered solid in many sectors, but the only meaningful test is the comparison with the required return, the interest on debt and industry figures. Look at the multi-year development too: a stable or rising return says more than one good year.

How to improve profitability

• Raise margin: address pricing and cost of sales, visible in EBITDA.
• Increase asset turnover: more revenue on the same balance sheet.
• Reduce working capital: bring down inventory and receivables.
• Optimise capital structure: use leverage without undermining resilience.

Frequently asked questions

What is return on equity?
Net profit expressed as a percentage of average equity. It shows how efficiently shareholder capital is converted into profit.

How do you calculate ROE?
Divide net profit by average equity and multiply by 100.

What is the difference between profitability and margin?
Margin compares profit to revenue; profitability ratios compare profit to capital. A thin-margin business can still show a high return if asset turnover is high.

What is the leverage effect?
When return on assets is higher than the interest rate on debt, additional debt raises return on equity — while also increasing risk.

Profitability in every monthly report

Smartbooks includes ROE, ROA and margins in your management reporting by default, per entity and consolidated. Book a demo and see it on your own numbers.