Efficiency Ratios: ROE, ROA & Asset Turnover
Metrics that reveal how well a company uses its capital and assets.
Efficiency ratios measure how effectively management deploys the company's resources to generate returns. These metrics help investors distinguish between companies that create value and those that destroy it.
Return on Equity (ROE)
ROE measures how much profit a company generates for each dollar of shareholder equity. It is the single most watched efficiency metric.
- Formula: Net Income ÷ Shareholders' Equity × 100
- ROE above 15% is generally considered excellent
- ROE below 5% suggests poor capital allocation
Warning: ROE can be inflated by high debt. A company with massive debt has low equity (the denominator), which makes ROE appear high even if profits are modest. Always check the D/E ratio alongside ROE.
Return on Assets (ROA)
ROA measures profit generated per dollar of total assets. Unlike ROE, it is not affected by leverage.
- Formula: Net Income ÷ Total Assets × 100
- ROA varies by industry but 5%+ is generally solid
- Asset-heavy industries (manufacturing, utilities) naturally have lower ROA
Asset Turnover
Shows how efficiently a company uses its assets to generate revenue.
- Formula: Revenue ÷ Total Assets
- A ratio of 1.0 means the company generates $1 of revenue per $1 of assets
- Retailers often have high turnover (>2.0); utilities have low turnover (<0.5)
Putting them together
A company with high ROE, healthy ROA, and good asset turnover is likely a well-managed business with sustainable competitive advantages. If ROE is high but ROA is low, the company is probably leveraged — check the balance sheet.
MetricSide tracks all these ratios on the Efficiency tab for every stock.