ROIC vs ROE vs ROA vs ROI

Return On Invested Capital versus Return On Equity versus Return On Assets versus Return On Investment. Why do we need them, and what are the similarities and differences between these financial metrics?

⏱️TIMESTAMPS⏱️
0:00 Introduction
0:15 ROIC ROE ROA ROI common factor
0:51 RO* formula
1:17 ROIC formula
1:32 ROE and ROA formula
1:43 ROI formula
1:56 ROIC vs ROE
2:23 ROA vs ROE
3:24 ROA vs ROI
4:02 ROE vs ROI
4:33 ROIC ROE ROA ROI summary

Let’s start with the common factor in these financial metrics. ROIC, ROE, ROA, ROI. Do you see any similarities? Yep! They all start with R O which means Return On, which is then followed by one or more letters of the alphabet. Each of these financial metrics is trying to help you understand how much bang for the buck you get, in more financial terms how much value for money you get. For all of these financial metrics (ROIC, ROE, ROA, ROI), the higher the better, assuming the returns are sustainable and not a one-off.

That’s because the formula, the calculation of the financial metrics, is very similar. Put the bang in the numerator, and put the buck in the denominator. In other words, put the outputs or benefits or returns (per year) in the numerator, and the inputs or investment or capital in the denominator. If I invest $1, how much annual return is being generated on that investment.

Let’s look at the formula more specifically for each of the four common financial metrics. ROIC, Return On Invested Capital, is calculated as the sum of after-tax interest expense plus net income, divided by the sum of debt plus equity. ROE, Return On Equity, is calculated as net income divided by equity. ROA, Return On Assets, is calculated as net income divided by assets. ROI, Return On Investment, is calculated as benefits or returns divided by investment. Let’s make some meaningful comparisons on a one-to-one basis between these financial metrics.

In summary: ROIC, ROE, ROA and ROI are similar metrics, helping you to analyze whether an investment brings value for money. You can choose which financial metric to use for a specific situation. Each metric has a situation where it provides the most relevant perspective. Remember, financial analysis is as much an art as it is a science!

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Learn how to do #financialanalysis. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[nitebone]

I like the video but at 3:20 you said and wrote ROA but spelled out Return On Equity.

[ah]

Truly on of the most comprehensive and well-structured explanations on a finance topic, in the whole world!! Thanks a lot!!

[hailun]

I had to watch this video more than once because English is not my mother tongue but you were really helpful! Thank you

[eduardusadrian]

Hey, thanks for this vid man.I used to use ROE on analyzing a stock, but now ive learnt that ROIC is the complete package thanks to you!

[josejuancruzgonzalez]

Thank you from México, easy and clear Knowleage.

[konstancyja]

My absolute favoriete video so far! Playful and easy to understand! BANG!

[abelardogallegosm.]

This is very clear even for a non-english speaker, regards from Mexico

[sivakumaranbazhagan]

this is excellent video .i could get the concept easy. bang and buck analogy was very good. this video deserves apllause.

[blackm]

Great way to deliver the information 👌 subscribed

[mouhcinesghir]

Clear and concise explanation. Thank you

[saritafriguglietti]

Very good explanation! Good succint overview.

[KrishanSingh-gzop]

In Invested Capital of Return on Invested Capital (ROIC), is there only bondholder and shareholder? Does the invested capital contain loans/Borrowings/Debt in addition to bondholders & shareholders?

Question 2 :- While calculating ROIC, ROE, ROA, ROI, etc . Do we have to divide returns for the current year by the Invested capital-ROE-ROA-ROI of the same year. OR why can't we calculate returns on ROIC-ROA-ROE-ROI : by taking returns for the current year ended & the Invested capital, assets, equity, investments, etc. for the previous year. I.e. ROIC (for year 2020) = returns
( ending 2020)/ Invested Capital (ending 2019); similarly ROA (2020) = Return (2020)/ assets (2019).

[aldolabuonora]

excellent video! Do you think it is important to see these ratios based on the price / book value? If I understand correctly, they are metrics that measure the profitability of the book value (at least the ROE) So for example, if a company has an ROE of 20% but trades at a price / book value of 10 times, I am having a return on my investment of only 2%, is that correct?

[josismart]

First of all Thanks but How to calculate sales price from return on investment after tax

[dharmenjoshi]

Nice Video, kindly advice before buying Company Share (Equity), what information & factors we should note

[lfs-xr]

So which one reflects best the potencial for a stock price to go up?

[efimovdk]

Thank you very much for such a comparison and not plain explanation! I wonder why ROIC and ROA have their denominators written in different way but actually standing for the same thing according to balance sheet equation. What is the point of doing this?

[KrishanSingh-gzop]

Companies also publish Quarterly RoE, RoCE, etc. in their quarterly investor presentations which they release along with quarterly Earnings.

My question is how do they calculate the Quarterly Denominator value ( Equity, Capital Employed, Invested Capital etc.) on which the quarterly returns are calculated? Do they take annual Denominator value (Invested Capital, Equity, Capital Employed etc.) and divide it by 4 to arrive at quarterly Invested capital, Equity, capital employed etc.?

[touqeerahmed]

Thanks for the explanation, but, please avoid Red and Blue corner, really Disturbs the attention.

[maxjames]

Why does equity go down when a company does buybacks? I'm looking at HPQ and they have a negative ROE because they have a negative equity (im guessing because they do a lot of buybacks) but why?

And is there a way to calculate ROE when equity is negative due to buybacks?