What is ROE?
ROE stands for Return on Equity. It's like checking how well a company uses the money its owners (shareholders) put in to make more money. If a company has a high ROE, it means it's doing a good job of using its owners' money to make a profit.
What is ROA?
ROA stands for Return on Assets. It's like checking how well a company uses everything it owns (like cash, buildings, and machines) to make money. A high ROA means the company is good at turning its assets into profit.
Key Differences
- What they measure: ROE measures how well a company uses owners' money. ROA measures how well a company uses everything it owns.
- What they include: ROE only looks at the money from owners. ROA looks at all the company's stuff.
- How they can be misleading: ROE can look really good if a company borrows a lot of money (debt), even if it's not really that great. ROA isn't as easily tricked by debt.
When to Use Each One
Let's say you're choosing between two lemonade stands. If you want to see which stand is better at using the money its owners put in, you'd use ROE. If you want to compare a lemonade stand to a car wash, you'd use ROA to see which one is better at using everything it owns (like lemons, sugar, soap, and towels) to make money.
The Bottom Line
ROE and ROA are like two different tools that help you understand how well a company is doing. ROE is great for comparing companies in the same business. ROA is better for comparing companies in different businesses. Use them both to get the whole story!