When it comes to business, there are a lot of acronyms and terms thrown around. Two of the most common terms you'll hear are return on equity (ROE) and return on investment (ROI). But what do these terms really mean? And what's the difference between the two?

What is Return on Equity (ROE)?

ROE is a measure of a company's profitability that takes into account how much capital the company has invested. ROE is calculated by dividing a company's net income by its shareholders' equity.

What is Return on Investment (ROI)?

ROI is a measure of a company's profitability that takes into account the company's investment in assets. ROI is calculated by dividing a company's net income by its total assets.

The Difference Between ROE and ROI

The main difference between ROE and ROI is that ROE measures profitability in relation to shareholder equity while ROI measures profitability in relation to total assets.

What Does This Mean for Investors?

ROE is a good measure of a company's profitability, but it's important to keep in mind that it only takes into account the company's equity. This means that if a company has a lot of debt, its ROE will be lower than it would be if the company had no debt.

ROI is a good measure of a company's profitability, but it's important to keep in mind that it only takes into account the company's assets. This means that if a company has a lot of liabilities, its ROI will be lower than it would be if the company had no liabilities.

Final Thoughts

ROE and ROI are both important measures of a company's profitability. However, it's important to keep in mind that ROE only takes into account the company's equity while ROI only takes into account the company's assets.