ROE vs ROIC: why Apple's 149% return on equity says little and its ROIC says a lot

Two companies each earn $10 of profit. One needed $50 of capital to do it, the other $200. The first is a much better business — it can grow by reinvesting at four times the rate — and return on capital is how you tell them apart. But there are two common versions of the measure, return on equity (ROE) and return on invested capital (ROIC), and they often tell completely different stories about the same company. This guide explains both, shows where ROE goes wrong, and ranks the companies we cover on the measure that holds up.

How each is calculated

Return on equity = net income ÷ average shareholders' equity. We average the equity at the start and end of the twelve months, so a single balance-sheet date cannot distort it. ROE answers: how much did the company earn for each dollar the shareholders have in the business, on its books?

Return on invested capital = operating profit after tax ÷ invested capital. Invested capital is shareholders' equity plus debt minus cash — all the money tied up in running the business, however it was financed. Operating profit after tax uses the company's own effective tax rate when it falls between 5% and 35%, and the 21% US statutory rate when it does not, so a one-off tax benefit cannot inflate the result. ROIC answers: how much does the business earn on all the capital it actually uses?

The difference sounds technical. In practice it is the difference between a number that can be engineered and one that mostly cannot.

Three ways ROE gets inflated

1. Buybacks shrink the denominator. When a company buys back its shares, the cash leaves and shareholders' equity falls. Repeat that for a decade and equity becomes small relative to the business. Apple has returned enormous sums this way: its shareholders' equity was $107.52bn against a market value of $5,005.2bn. Its ROE of 148.75% says more about that shrunken equity than about the business. Its ROIC of 84.08% — still exceptional — is the more honest measure.

2. Debt does the same. A company that borrows to fund dividends or buybacks needs less equity for the same assets, so ROE rises even if the business earns no more. Coca-Cola's ROE of 44.64% and PepsiCo's 52.09% look like those of growth companies; their ROICs of 17.99% and 17.21% are those of very good, mature ones. PepsiCo carries shareholders' equity of just $22.29bn. Compare them in Coca-Cola vs PepsiCo.

3. Profit from outside the business. ROE uses net income, which includes investment gains and tax items. Alphabet's ROE of 48.68% reflects net income well above its operating income; its ROIC, built from operating profit, is 17.59%. Uber shows the same pattern, with an ROE of 37.74% against an ROIC of 15.05%.

The ranking that holds up

Return on invested capital over the past twelve months, with ROE beside it for contrast:

Two things stand out. First, the ROE column exaggerates almost everyone; Eli Lilly's 102.44% shrinks to 34.35% and Coca-Cola's falls by more than half. Second, the gap between the two measures is itself informative: a small gap, as at Microsoft, AMD or Tesla, means the balance sheet is not doing much of the work. A large gap means buybacks, debt or non-operating profit are.

What counts as a good ROIC?

A business creates value when it earns more on its capital than that capital costs — roughly what investors could expect to earn elsewhere for similar risk. For large companies that cost is usually put somewhere in the high single digits. Below it, growth destroys value: every extra dollar invested earns less than it costs.

Our style tags use a stricter test. A company with an ROIC of 15% or more and an operating margin of 25% or more is tagged "high-quality", because sustaining returns that high usually requires a durable advantage — a brand, a network, a technology lead — that competitors cannot quickly copy. Several companies above clear that bar comfortably. Micron is the reminder that a single year proves little: its returns come from a strong phase of a memory-chip cycle that has reversed before, and the same company lost money in its 2023 fiscal year. Durable means across a cycle.

Where neither measure works

• Banks. A bank's invested capital would be dominated by customer deposits, so we do not compute ROIC for banks at all. ROE is the right measure there: JPMorgan's 17.79% against Bank of America's 11.23% is the core of how to compare bank stocks.
• Loss-makers. Intel's ROE was −11.68% and its ROIC −0.05%: with no operating profit, there is no return to rank.
• Tiny or negative equity. If average shareholders' equity over the year is zero or negative we do not compute ROE at all, and if equity plus net debt is less than a twentieth of total assets we withhold ROIC, because it would measure a sliver rather than the business. Both rules are listed in the numbers we refuse to print.

How to use it

Use ROIC to judge the business and ROE to understand the balance sheet. If ROE is far above ROIC, find out whether buybacks, debt or one-off profit explain it. Check that returns are above the cost of capital across a whole cycle, not just in a good year. And remember that a high return is only valuable if the company can keep reinvesting at it — Apple's 84.08% ROIC is extraordinary, but its revenue grew just 1.81% a year over three years, so much of that capital comes back to shareholders rather than being reinvested. For how returns feed into our quality factor, see the six-factor score explained; for the margin side of the same story, operating margin by business model.