ROI, ROIC, and ROE are three of the most widely used financial metrics for measuring performance and profitability. They all deal with “returns,” but what they measure (and why it matters) differs depending on the context.
ROI focuses on the return from a specific investment or project. ROIC looks at how efficiently a company generates returns from all the capital invested in it. ROE zooms in on the return generated for shareholders.
Knowing which metric to use helps ensure your analysis, reporting, and business case discussions are grounded in the right financial logic, so let’s unpack each one in turn.
What is ROI?
ℹ️ - you can read our more detailed guide on Return on Investment (ROI), but here is a quick refresher:
Return on Investment (ROI) is the simplest and most common way to measure profitability. It shows how much gain or loss you’ve made relative to the amount you invested.
Formula
ROI (%) = ( Net Profit / Cost of Investment ) × 100
where:
Net Profit = Total Revenue - Initial Investment
Cost of Investment = The amount spent on the investment
Example
If you invest $100,000 in a project that delivers $130,000 in net benefits, your ROI is 30%, as ($30,000 / $100,000) * 100 = 30%
Why it matters
ROI helps answer a straightforward question: Was this investment worth it? It’s easy to understand, quick to calculate, and useful for comparing multiple projects or purchases.
When to use it
Evaluating project-level performance
Comparing alternative business cases
Communicating results to non-financial stakeholders
Limitations
Ignores the time value of money (i.e. a project that delivers 30% over three years is not the same as one that delivers 30% in six months)
Doesn’t consider financing or capital structure
Can oversimplify complex investments
ROI is a great starting point for assessing value, but it doesn’t tell the full story. That’s where ROIC and ROE come in.
What is ROIC?
Return on Invested Capital (ROIC) measures how effectively a company generates profits from the total capital invested in it (both equity and debt), therefore provides a more complete picture of operational efficiency and capital productivity.
Formula (simplified)
ROIC = Net Operating Profit After Tax (NOPAT) / Invested Capital
Example
If a company earns $20 million in NOPAT and has $200 million in invested capital, its ROIC is 10%.
Why it matters
ROIC tells you how efficiently a business is turning capital into profits. It’s especially important for investors and executives because it shows whether a company is creating value above its cost of capital.
When to use it
Assessing company-wide performance
Comparing how efficiently different divisions or competitors use capital
Understanding whether management is making good investment decisions
Limitations
Requires consistent accounting data and adjustments for accuracy
Not as intuitive as ROI for project-level decisions
Can vary across industries depending on capital intensity
If a company’s ROIC is higher than its weighted average cost of capital (WACC), it’s generating true economic value. If it’s lower, it’s destroying value, even if accounting profits look healthy.
What is ROE?
Return on Equity (ROE) measures how effectively a company uses shareholders’ equity to generate profit. It’s therefore a key indicator for investors because it reflects how much income is produced for every dollar of equity invested.
Formula
ROE = Net Income / Shareholders’ Equity
Example
If a company earns $10 million in net income and has $50 million in equity, its ROE is 20%.
Why it matters
ROE focuses on the shareholders’ perspective as it’s the return they’re getting on their ownership stake. It’s often used to compare profitability between companies in the same sector or track performance trends over time.
When to use it
Evaluating shareholder returns
Comparing companies within the same industry
Assessing management’s effectiveness at generating profit from equity
Limitations
Ignores the role of debt; a company can boost ROE by taking on more leverage, even if its overall health doesn’t improve
Can distort comparisons if companies have very different capital structures
Doesn’t measure the efficiency of total capital use, only equity
A high ROE is beneficial, but context matters, as a company with a strong ROE and high debt may be riskier than one with a slightly lower ROE but a healthier balance sheet.
Putting it together
Metric | Measures | Best For | Includes Debt? | Key Limitation |
|---|---|---|---|---|
ROI | Return on a specific investment | Project-level evaluation | No | Ignores time and financing |
ROIC | Return on total invested capital | Company-level efficiency | Yes | Requires detailed accounting data |
ROE | Return on shareholder equity | Comparing company profitability | No | Can be inflated by leverage |
Each metric, therefore, provides a different lens for understanding return; ROI helps evaluate specific investments, ROIC reveals operational efficiency, and ROE highlights shareholder profitability.
Which Metric Should You Use?
1️⃣ Use ROI when assessing an individual business case, product launch, or technology investment. It’s practical, intuitive, and ideal for project-level comparisons.
💱 Use ROIC when analyzing how well your organization converts capital into profit. It’s a key measure for strategic decisions and long-term value creation.
👨💼 Use ROE when you want to understand the return being generated specifically for shareholders or equity investors.
In practice, many companies use all three metrics together: ROI for investment decisions, ROIC for internal performance tracking, and ROE for communicating value to shareholders.
How KangaROI Makes This Easier
ROI sits at the core of every business case built in KangaROI. Once you define your costs, benefits, and timelines, your ROI is automatically calculated and visualized, with options to model benefit ramp-up, delays, and adoption rates.
Scenario Modeling lets you explore multiple versions of the same business case, each with its own ROI, so you can understand the trade-offs before committing capital.
And with Risk-Adjusted ROI, KangaROI helps you incorporate potential risks directly into your financial view, thereby giving you a clearer picture of expected versus optimistic outcomes.
While ROIC and ROE are broader corporate metrics, KangaROI ensures that your project-level ROI connects back to organizational performance goals, helping bridge the gap between tactical business cases and strategic capital efficiency.
In Summary
ROI, ROIC, and ROE each tell a different part of the return story:
ROI shows whether an individual investment delivers value
ROIC measures how efficiently a company turns capital into profit
ROE reveals how effectively equity generates shareholder returns
Knowing which to use (and most importantly, when) keeps your business cases aligned with the financial priorities of your organization. When you understand the difference, your investment decisions become clearer, your comparisons more meaningful, and your recommendations far more credible.
