Profitability Ratios: ROE, ROA, ROCE, and Margins

Profitability ratios measure how effectively a company turns its resources into profit. This post covers five key ratios: Return on Equity (ROE), Return on Capital Employed (ROCE), Return on Assets (ROA), gross margin, and net margin.

This is Part 3 of the Fundamental Analysis series. If you're new to the series, start with Liquidity Ratios and Valuation Ratios before moving on to profitability.

Return on Equity (ROE)

Return on equity measures how efficiently a company turns shareholders' capital into profit.

ROE = Net Profit / Shareholders' Equity

Net profit is a company's profit after tax. Suppose it costs a company $100 to manufacture a product — covering all expenses — and the company sells it for $150. Profit before tax is $50. After paying 30% tax ($15), the net profit is $35.

Shareholders' equity is the sum of share capital (the capital shareholders originally invested) and reserves (profits the company has retained over time).

ROE shows how well a company generates profit using its own money, not borrowed capital. An ROE above 15% is generally considered excellent.

Return on Capital Employed (ROCE)

ROCE = EBIT / Capital Employed

EBIT, or Earnings Before Interest and Taxes, represents a company's operating profit. Capital employed is the sum of shareholders' equity and long-term debt.

While ROE looks at only net profit and shareholders' equity, ROCE broadens the picture by factoring in debt alongside equity and using operating profit instead of net profit. It measures how efficiently a company uses its entire capital base — not just the shareholders' portion — to generate operating profit.

Return on Assets (ROA)

Return on assets measures how much net profit a company generates from its total assets.

ROA = Net Profit / Total Assets

Suppose a company earns $30 million in net profit on $100 million in total assets. Its ROA is 30% — the company generates 30 cents of profit for every dollar of assets it holds.

ROA is especially useful for evaluating banks and other financial institutions, since these businesses are asset-heavy. For banks, an ROA above 1.5–1.8% is generally considered good. That threshold sounds low, but banks operate with far larger asset bases than most companies, so even small percentage differences add up to significant amounts.

A low ROA can signal inefficient operations, poor lending performance, or weak expense management. Conversely, an unusually high ROA may point to risky lending practices rather than genuine operational strength. Bank assets typically include loans, cash, and investments. ROA is also closely tied to a company's cost of capital.

Gross Margin and Net Margin

Gross Margin = (Total Revenue − Cost of Revenue) / Total Revenue

Gross margin accounts for only direct production costs. It excludes interest, taxes, salaries, rent, and other operating expenses.

Net margin, by contrast, reflects what remains at the bottom of the income statement after every expense — interest, taxes, salaries, and depreciation — has been deducted. A company can have a strong gross margin but a weak net margin when interest costs or overhead are unusually high.

Gross margin matters because the money left after production costs funds marketing, R&D, and everything else a business needs to grow.

Putting the Three Ratios Together

ROA measures overall asset efficiency, ROE shows how well shareholders' funds are put to work, and ROCE measures total capital efficiency including debt. When a company carries heavy debt, its ROE can look artificially high, while ROA and ROCE give a clearer picture.

Comparing Apple, Microsoft, and Alphabet

The financial data below is from Yahoo Finance, using trailing twelve-month (TTM) income statements and balance sheet data as of March 31, 2026. Here are the key numbers used to derive each ratio.

Apple (AAPL): Revenue $451.44B, cost of revenue $235.37B, operating income (EBIT) $147.37B, net income $122.58B, shareholders' equity $106.49B, total assets $371.08B, capital employed $191.20B.

Microsoft (MSFT): Revenue $318.27B, cost of revenue $100.86B, operating income (EBIT) $148.96B, net income $125.22B, shareholders' equity $414.37B, total assets $694.23B, capital employed $454.63B.

Alphabet (GOOGL): Revenue $422.50B, cost of revenue $167.45B, operating income (EBIT) $138.13B, net income $160.21B, shareholders' equity $478.75B, total assets $703.92B, capital employed $556.25B.

Summary

ROE, ROCE, and ROA each measure profitability from a different angle — shareholders' equity, total invested capital, and total assets, respectively. A high ROE driven by heavy debt or share buybacks should always be cross-checked against ROCE and ROA. Gross margin reflects pricing power and production efficiency, while net margin shows what remains after all expenses. Compare these ratios against peers in the same sector, since capital structure and asset intensity vary widely across industries.

All financial data sourced from Yahoo Finance, using TTM income statements and balance sheet data as of March 31, 2026.

Sources and references

• Return on Equity (ROE) — Investopedia
• Return on Assets (ROA) — Investopedia
• Return on Capital Employed (ROCE) — Investopedia
• Profit Margin — Investopedia

This analysis is for educational purposes only and does not constitute investment advice.