Difference between ROE and ROA
There are many indicators that can be used to measure the financial status of a company and ROE and ROA are two of them. Profit is always measured in comparison to the assets that a company has. Most of the people get confused between these two indicators because both of these evaluate the profitability of a company on the basis of returns a company reaps in comparison to the investments it makes.
ROE or Return on Equity is the result that you get when you divide the net profit by total equity. This is one of the most effective methods to measure the performance of a company and to find out that how a company is using the money of the investors and shareholders. The results are easily measurable in percentage and thus easy to compare.
ROA is Return on Assets. This is measured by dividing the net profit by the total assets a company has. If the ratio is high then one can easily understand that the company is using its assets in effective manner. It is a simple fact that if a company is generating more profit by using the same assets that it has then the company is not investing anything and still getting increased profit.
ROA is a better way to assess the financial status and performance of any company because if a company takes loan then ROE will be more than ROA. Higher ROE here would not mean greater profitability. It is easier to measure the performance in terms of assets but if a company does not have any debts then equity and assets will be same for a company.
If ROA is high and the company has debts which are being easily managed by it and if ROE is also high then we can say that the company has a stable financial condition with satisfactory financial performance and profits. In the same scenario if ROA is low then the company has huge debts and we can say that the management is not using the resources in effective manner.
We can conclude that although both these indicators use different parameters to measure the financial health of a company but the best way to measure it is a combination of both these indicators because all the factors affecting the profitability of a company coexist and influence each other