ROE, ROA, and ROI: A Guide for Non-Finance Leaders

 Read time: 3 mins

Welcome to this week’s edition of Financial Fluency. Today, we’re going to demystify three key financial metrics: Return on Equity (ROE), Return on Assets (ROA), and Return on Investment (ROI). Understanding these metrics is crucial for non-finance leaders to make informed decisions and contribute effectively to their organization’s financial success.

Why It Matters to You

As a non-finance leader, you’re often involved in decisions that impact your department’s performance and financial health. Understanding ROE, ROA, and ROI can help you assess the efficiency of your investments, make strategic decisions, and communicate more confidently with your finance team.

ROE, ROA, and ROI: What’s the Difference?

ROE (Return on Equity) measures the profitability of a corporation in relation to stockholders’ equity. It is calculated as Net Income divided by Shareholder’s Equity. A higher ROE indicates that the company is using its investors’ funds effectively.

ROA (Return on Assets) measures how efficiently a company is using its assets to generate earnings. It is calculated as Net Income divided by Total Assets. A higher ROA indicates that the company is using its assets effectively to generate profits.

ROI (Return on Investment) measures the gain or loss made on an investment relative to the amount of money invested. It is calculated as (Net Profit / Cost of Investment) * 100%. A higher ROI indicates that the investment gains compare favourably to its cost.

Key Takeaways for Non-Finance Leaders

1. Budgeting and Planning: Understanding ROE, ROA, and ROI can help you plan and manage your department’s budget more effectively. For example, if a large portion of your budget is allocated to a project, you might need to calculate the ROI to ensure it’s a good investment (likely completed as part of the business case phase of a project being approved to commence).
2. Decision Making: When deciding whether to invest in a new project or equipment, understanding these metrics can guide your decision. Each metric provides a different perspective on the financial health and efficiency of your department or organization.
3. Financial Reporting: ROE, ROA, and ROI are important metrics in financial reporting. They provide insights into the company’s financial health and operational efficiency. Understanding these metrics can help you interpret financial reports and make informed decisions. ROE and ROA are both metrics that assess a businesses ability to generate returns on its capital, where as ROI assesses the performance of a specific investment.
4. Performance Measurement: These metrics can be used to measure the performance of your department. By tracking these metrics over time, you can identify trends, measure progress towards your goals, and take corrective action if necessary. While you may not have access to all financials across your organization to critically assess each metric, making reference to metrics such as these (at a minimum demonstrating a basic understanding) will certainly shine a positive light on your financial acumen.

Remember, enhancing your financial acumen is a journey. Don’t hesitate to ask questions and seek further understanding. Stay tuned for our next newsletter where we’ll continue to break down financial concepts in an easy-to-understand manner.