When evaluating a joint-stock company, it is not enough to know whether it is profitable. Investors should also examine how much capital and assets the company needs to generate that profit, and how efficiently it uses these resources. The ROE, ROA and ROIC indicators offer three different perspectives on the quality and performance of a business.

ROE: Return on Shareholders’ Equity

ROE (Return on Equity) shows how much profit a company generates from the capital belonging to its shareholders. It is calculated as net profit divided by average equity: ROE = net profit / average equity × 100. For example, if a company earns EUR 2 million with average equity of EUR 20 million, its ROE reaches 10%. This means it generated 10 cents of profit for every euro of shareholders’ capital.

When High ROE Can Be Misleading

A high ROE alone does not necessarily mean that a company is of higher quality. The indicator can rise as a result of higher debt, share buybacks or a decline in equity, even without a significant improvement in operations. If equity is negative, the result may even become practically unusable. Investors should therefore assess ROE together with debt levels, the development of equity and the reasons behind its changes. Similar to a stock’s target price, no single isolated figure provides a complete picture of a company, as we also discussed in our previous article.

ROA: How Efficiently a Company Uses Its Assets

While ROE focuses on shareholders’ capital, ROA (Return on Assets) measures how effectively a company uses all its assets to generate profit. It is calculated as net profit divided by average total assets: ROA = net profit / average assets × 100. In practice, this means that with a profit of EUR 2 million and average assets of EUR 40 million, ROA reaches 5%. The indicator therefore captures the efficiency of the entire asset base, regardless of whether it was financed by equity or debt.

Why ROA Differs Across Industries

The typical level of ROA depends heavily on the nature of the business. Manufacturing, energy or transport companies require large amounts of production halls, machinery and infrastructure, which is why they often achieve lower values. Software or consulting firms operate with fewer tangible assets, so their ROA can be substantially higher. The percentage alone therefore says little without industry context. The most meaningful comparison is between direct competitors and the development of one company over several years.

ROIC: Return on Invested Capital

ROIC (Return on Invested Capital) broadens the view to include capital provided by both shareholders and creditors. It is calculated as NOPAT divided by average invested capital: ROIC = NOPAT / average invested capital × 100. NOPAT represents operating profit after tax. Invested capital usually includes equity and interest-bearing debt, while excess cash may be deducted from it. The indicator therefore reveals how efficiently a company converts the capital employed in its business into operating returns.

ROIC and WACC: Is the Company Creating Value?

ROIC is most informative when compared with WACC, the company’s weighted average cost of capital. If ROIC is higher than WACC, the return on invested resources exceeds the cost of obtaining them and the company generally creates economic value. If it is lower, the company may not be covering the cost of the capital used, even if it remains profitable in accounting terms. However, what matters is not only the result of a single year, but especially the company’s ability to maintain a positive spread between ROIC and WACC over the long term.

How to Use ROE, ROA and ROIC When Selecting Stocks

These indicators are best assessed together. ROE captures the return on shareholders’ capital, ROA shows the efficiency of using total assets, and ROIC measures the return on capital employed in operations. Investors should track their long-term development, compare companies from the same industry and examine the reasons behind significant changes. At the same time, they should be complemented by an assessment of debt, revenue, margins, cash flow and stock valuation. After all, even a high return on capital does not automatically mean that a stock is an attractive investment at its current price.

For more investment trends and useful tips, see our previous articles on AxilAcademy.