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Understanding ROE and ROIC: Maximizing Business Profitability

Learn the financial metrics Return on Equity (ROE) and Return on Invested Capital (ROIC) to assess business performance and profitability effectively. Examples and comparisons provided for clear comprehension. Enhance your knowledge in financial analysis and decision-making.

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Understanding ROE and ROIC: Maximizing Business Profitability

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  1. ROE / ROIC By Brendan Mathews

  2. Return on Equity Definition: ROE = One year’s earnings / Shareholder’s equity Driven by three things: Profit margins Asset Management Leverage

  3. Return on Equity ROE = [earnings / sales] * [sales / assets] * [assets / equity]

  4. Return on Invested Capital • ROIC = Earnings / (Equity + Debt)

  5. Business A Started with $10,000 Earned $1,500 in 1st year ROE = %15 Business B Started with $10,000 Earned $1,200 in 1st year ROE = %12 ROE vs ROIC

  6. Business A Started with $10,000 Earned $1,500 in 1st year ROE = %15 Borrowed $5,000. ROIC = %10 Business B Started with $10,000 Earned $1,200 in 1st year ROE = %12 Zero Debt ROIC = %12 ROIC vs ROE

  7. Conclusion The best businesses have a high ROIC / ROE and little debt. QUESTIONS?

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