If you are looking to expand your investment portfolio, you will come across these two important terms ROI and ROE. These are the most commonly used for measuring performance metrics and the health of your investment. Although both ratios are used by analysts to determine investment strategies. In addition, it is also used to test the efficiency of an investment. Let us check and try to understand the difference between ROI Vs ROE in this article.
What is ROI?
ROI stands for Return on Investment. It is a metric used to assess the returns of investment or compare the efficiency of different investments. The ROI is calculated as the difference between the cost of investment and its return. The ratio of profit made in a financial year as a percentage of investment is called ROI.
ROI = Net income / Investment cost OR ROI = Total profit / Initial investment
ROE stands for Return on Equity. It is a metric used to assess the profitability of a business in relation to equity. It is the amount of net income of a company expressed as a percentage of its shareholder's equity. ROE measures how much profit a company generates as compared to its shareholder's equity. Thus, the higher ROE means the company is generating more profit for its shareholders.
ROE = Net income / Equity of shareholder
ROI Vs ROE | Difference between ROI Vs ROE:
- The most important difference is that ROI is the most widely used profitability measure. Whereas ROE is used for the return to stockholders.
- ROI measures profit or loss on investment to its initial cost. In contrast, ROE measures how much profit a company generates on the equity of shareholders.
- ROI allows debt to be considered while calculating the ROI. Whereas calculating the ROE, debt is not considered to account.
- ROI calculates the return that the investment produces, while ROE calculates by dividing net income by shareholders' equity.
- The formula for ROI = Net income / Investment cost OR ROI = Total profit / Initial investment. The formula for ROE = Net income / Equity of shareholder.
- The ROI can be used to ensure clear profitability before taking on debt. The ROE can be used to compare the profitability of the company.
- Return on investment recognizes good leadership. While return on equity determines the value of the cost opportunity.