Return on Investment Vs. Return on Equity

by Eric Dontigney; Updated September 26, 2017
Businessman using digital tablet

Return on investment, or ROI, and return on equity, or ROE, are ratios that provide two different ways to assess profitability, typically of a business. The two approaches measure different things and return different answers. Higher percentages for both tend to indicate a healthier business, but total debt plays a role in ROE and in more specific calculations of business health.

Return on Investment

ROI refers to how much money is made from a specific investment. A standard method of calculating ROI is to divide after-tax profits by total assets or, in the case of a project, after-tax profits divided by total investment. If a project calls for a $40,000 total investment and yields a $9,000 after-tax profit, the ROI comes to 22.5 percent. Standard ROI calculations do not account for debt and can give a false impression of business health.

Return on Equity

ROE refers to how much money is made on the basis of an individual’s total ownership stake. A standard method of calculating ROE is to divide after-tax profit by equity or an individual’s total stake. For example, an individual who invests $20,000 in the $40,000 project divides $9,000 after-tax profit into her $20,000 stake for a 45 percent ROE. The higher the debt incurred to finance a project or business, the lower the ROE. Single-digit ROE percentages often signal poor business health.

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