What is ROE?
ROE stands for Return on Equity. Think of it like this: if you invest your allowance in a company, ROE tells you how much profit the company makes with your money! It shows how good the company is at using its owners' investments to make more money.
What is ROIC?
ROIC stands for Return on Invested Capital. This is similar to ROE, but it looks at all the money a company uses to make profit, not just the owners' money. This includes money the company borrowed from the bank or other people.
Key Differences
The main difference is what kind of money each one looks at. ROE only cares about the owners' money, while ROIC looks at all the money. Another difference is that ROIC is a little harder to calculate because you need more information about the company's debts. Finally, ROE can be misleading if a company borrows a lot of money, because it can make the company look better than it really is.
When to Use Each One
Use ROE when you want a quick and easy way to compare companies in the same industry. For example, if you're comparing two toy companies, ROE can help you see which one is better at using its owners' money to make toys and sell them for a profit. Use ROIC when you want a more complete picture of how well a company is doing, even if it has borrowed money. Imagine you're comparing a lemonade stand that borrowed money for a fancy juicer to one that didn't. ROIC will help you see which stand is really better at making money, taking into account the borrowed money.
The Bottom Line
ROE is like a quick snapshot, while ROIC is like a detailed photograph. If you're just starting to learn about investing, ROE is a good place to start. But as you learn more, ROIC will give you a better understanding of how companies make money and how well they're managed. Remember, both ROE and ROIC are tools to help you make smart choices about where to invest your money!