Return on what? Meet ROA and ROE

Margins tell you how much profit survives per sales dollar. But there's a deeper question: how much profit does the company squeeze out of the resources it has to work with? That's what "return on..." ratios measure — and they're the ones professional investors quote most.

Two denominators, two questions

• Return on Assets (ROA) = net income ÷ total assets. Out of everything the company controls — factories, cash, inventory, equipment — how much profit does it generate? It answers: how good is management at turning assets into earnings?
• Return on Equity (ROE) = net income ÷ shareholders' equity. Out of the money that belongs to the owners specifically, how much profit is produced? It answers: how well is the company working for its shareholders?

Equity is what's left of the assets after subtracting what the company owes (assets − liabilities = equity). So ROE zooms in on the owners' slice, while ROA looks at the whole pie regardless of who funded it.

A worked example

An illustrative manufacturer:

• Net income $6bn, total assets $60bn → ROA = 10%.
• Shareholders' equity $30bn → ROE = 20%.

ROE is double ROA here. Why? Because only half the assets were funded by owners; the other half was funded by debt and other liabilities. Borrowing let the company control $60bn of assets while owners put up only $30bn — and that leverage magnified the return on their money. Which is a preview of a crucial idea: a high ROE can come from genuine quality, or simply from lots of borrowing. Separating the two is what the DuPont tree does, later in this course.

What counts as "good"?

As always, only in context. A consistent ROE in the mid-teens or higher, sustained over many years without ballooning debt, is generally regarded as a sign of a strong business. But a bank, a utility and a software firm live at completely different natural levels — compare like with like, and compare over time, not to a single magic threshold.

When equity is negative, every ratio with equity underneath it stops meaning anything. Return on equity comes out negative for a profitable company, debt-to-equity comes out negative, price-to-book comes out negative, and the DuPont multiplier flips sign. A screener sorted on any of them puts the company at the wrong end of the list. This is where the buyback case from the statements course lands in practice: McDonald's and Starbucks both report negative total shareholders' equity in their latest fiscal year (−$1.8 billion and −$8.1 billion), and the published return on equity reads 0 for both (read 29 September 2026), a placeholder rather than a return. For these companies read return on assets or return on invested capital, and lean on enterprise-value multiples, which do not divide by equity.

In the data

Both returns come published for Apple, trailing twelve months:

Apple's return on equity is above 100%. That is a denominator effect rather than a profitability one: buybacks have shrunk shareholders' equity, and the gap against return on assets is the leverage this lesson describes. Neither published figure says which equity or asset base it divided by, period-end or averaged, so a hand-computed ROE rarely matches the published one to the decimal.

Try it now

1. Read return on assets and return on equity in the table above and divide the second by the first. That multiple is the leverage this lesson is about, in one number, and on this company it is large enough to explain a return on equity the section above warns you not to read as profitability.
2. Build them yourself instead of trusting the published pair. Take net income from the income statement:

Then total assets and shareholders' equity from the balance sheet, at the two latest year ends:

Compare your ROE with the published one and measure the gap; then compute it a second time using the average of two period ends instead of one, and see which version lands closer. You have just worked out a definition the published figure never states. 3. Now the same two returns on a business that leans on liabilities in the ordinary way, with no buybacks cutting the denominator. Its return on equity is about 3.5 times its return on assets against Apple's 5.5 (read 29 September 2026), so the leverage effect is plainly visible and smaller: the wider gap upstairs came from an equity base shrunk by repurchases rather than from heavier borrowing.

Compare its two return figures with Apple's. A big gap means the business leans on liabilities to lift owner returns — hold that thought for the leverage unit and the DuPont lesson, where we take ROE apart.