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ROE, ROA, ROIC — measuring efficiency
Margins measure profit per dollar of revenue. Return ratios measure profit per dollar of CAPITAL — and capital is what shareholders are putting at risk. A company with 10% margins but 30% return on capital is creating enormous value because it produces profits without needing much capital. A company with 30% margins but 10% return on capital looks profitable on the income statement but consumes capital inefficiently. Return on capital is the single most important quality metric in fundamental analysis, and the one that most consistently separates wonderful businesses from merely profitable ones.
Three primary return ratios. (Return on Equity) = Net Income ÷ Shareholders' Equity. Measures profit on the owners' equity capital. 15%+ is good, 20%+ excellent. Inflated by leverage — a heavily-debted company can show high ROE on a thin equity base. = Net Income ÷ Total Assets. Includes debt-financed and equity-financed assets. Not inflated by leverage. Useful for cross-company comparisons. = NOPAT ÷ Invested Capital. Net Operating Profit After Taxes divided by capital actually invested in the business (debt + equity − cash). The gold standard. : every business has a cost of capital. ROIC above WACC creates value; below WACC destroys it.
ROE = Net Margin × Asset Turnover × Equity Multiplier. The decomposition reveals WHETHER a high ROE comes from profitability, efficiency, or leverage. Net Margin × Asset Turnover gives you ROA (returns on the underlying assets). Equity Multiplier (Total Assets ÷ Equity) measures leverage — how much asset base the company supports per dollar of equity. A 25% ROE composed of 5% margin × 1x turnover × 5x leverage is a very different business from 25% ROE composed of 25% margin × 1x turnover × 1x leverage. The first has serious bankruptcy risk in any downturn; the second is a high-margin franchise running on its own equity. Apple's reported ROE of 157% is mostly the equity multiplier — aggressive buybacks have shrunk equity to a small base. The underlying ROIC is roughly 50%, which is exceptional but more honest.
The single most important fact about return ratios is that companies maintaining ROIC above WACC for 10+ years almost always have wide moats. Mean-reversion of returns is the empirical default in capitalism — competition arrives, returns compress toward the cost of capital, only the moat-protected businesses sustain spreads of 10-20+ percentage points for decades. Visa (33% ROIC sustained), Apple (~50%), Microsoft (~30%), Costco (~20%), Berkshire (~12% but with massive scale) are textbook examples. When you find a company with sustained ROIC well above WACC, you've likely found a moat. When ROIC is compressing toward WACC, the moat is eroding. The platform's KPIs tab plots ROIC over 10 years for any company; it's the most diagnostic single chart in fundamental analysis.
All three companies sustain ROIC well above their cost of capital, but for different structural reasons. Visa: ~33% ROIC, driven by network effects and asset-light operations (no physical inventory, no factories, software-defined). Apple: ~50% ROIC, driven by brand premium pricing on hardware AND the recurring services/App Store revenue stream layered on top. NVIDIA: ~85% ROIC in FY2025, driven by AI-chip demand outpacing fabless production capacity (margins exploded with operating leverage; small invested-capital base because TSMC owns the fabs). Each represents a different moat structure (network effects, brand+ecosystem, technology+market position) but all produce the same financial signature — sustained returns far above WACC. The empirical pattern: companies with this signature for 10+ years compound shareholder wealth at rates well above broad-market averages, even when valuation multiples are 'expensive' on conventional measures. Source: Visa, Apple, NVIDIA FY2024-FY2025 10-K filings.
The Ratios tab plots ROE, ROA, and ROIC over 10 years for any company, with peer-group comparison. The KPIs tab shows the DuPont decomposition (margin × turnover × leverage components of ROE). The /screener page filters by ROIC range — useful for finding moat-protected names. Always look at the trend, not the single year.
First: high ROE driven by leverage looks great until the next downturn. DuPont-decompose ROE before celebrating. Second: ROA is misleading for banks (massive asset bases by nature, regulatory capital constraints) — use ROE for financials. Third: ROIC requires the same accounting choices applied consistently. Companies with off-balance-sheet leases, frequent acquisitions, or heavy intangible amortization have ROIC numbers that depend on how you handle each item. Use the platform's calculation methodology consistently, or recompute using a consistent framework. Damodaran's ROIC primer at NYU Stern is the academic-standard reference.
Over the long term, the return on a stock will roughly equal the return on invested capital that the underlying business produces. Find businesses that earn high ROIC for long periods, and the math takes care of itself. Find businesses that earn ROIC below their cost of capital, and time is your enemy.