What does ROI measure versus ROE in investment performance?

• A. ROI measures return on all invested capital; ROE measures return on shareholders' equity only.
• B. ROI measures return on assets; ROE measures total return on investment.
• C. ROI measures cost efficiency; ROE measures liquidity.
• D. ROI measures risk-adjusted return; ROE measures market value.

Answer: (A)

ROI measures profitability relative to all capital invested in the business, including both debt and equity. It answers: how effectively is every dollar of financing (from all sources) generating returns? ROE, on the other hand, measures profitability relative to shareholders’ equity alone, i.e., the return earned for the owners of the company after accounting for debt. The key difference is the denominator: ROI uses total invested capital, while ROE uses only equity.

Leverage helps explain why these can diverge. If a company uses debt, equity can be smaller while assets (and net income) stay the same, pushing ROE higher even if ROI doesn’t rise as much. For example, with net income of 100 and total invested capital of 1,000, ROI is 10%. If equity is 500, ROE is 20%. If debt increases and equity drops, ROE can climb further even if ROI doesn’t move much.

So ROI shows overall efficiency in using all capital, while ROE shows the return specifically earned on shareholders’ stake.