ROE / ROICROE / ROIC

By Brendan Mathews

Return on EquityReturn on Equity

Definition:

ROE = One year’s earnings / Shareholder’s equity

Driven by three things:

1. Profit margins

2. Asset Management

3. Leverage

Return on EquityReturn on Equity

ROE = [earnings / sales] *

[sales / assets] *

[assets / equity]

Return on Invested CapitalReturn on Invested Capital

ROIC = Earnings / (Equity + Debt)

ROE vs ROICROE vs ROIC

Business A– Started with $10,000– Earned $1,500 in 1st

year– ROE = %15

Business B– Started with $10,000– Earned $1,200 in 1st

year– ROE = %12

ROIC vs ROEROIC vs ROE

Business A– Started with $10,000– Earned $1,500 in 1st

year– ROE = %15– Borrowed $5,000.– ROIC = %10

Business B– Started with $10,000– Earned $1,200 in 1st

year– ROE = %12– Zero Debt– ROIC = %12

ConclusionConclusion

The best businesses have a high ROIC / ROE and little debt.

QUESTIONS?