ROA / ROE / ROI: Don't Fall for the "Return Rate" Sales Pitch

In 30 seconds: The same investment can show “return rates” that differ several-fold just by swapping the denominator. ROA = profit ÷ total assets; ROE = profit ÷ your own equity (borrowing amplifies it); ROI = profit ÷ the amount actually invested. Speculators love quoting only ROI to impress — “I put in NT$100k and made NT$30k, a 30% return!” — but you should ask for ROE: he has tens of millions and only dared invest NT$100k, so his real return is just 3%. Buffett says the single most important number for a business (or a person) is ROE — that’s the money you actually earned.¹

Three definitions

Metric	Full name	Denominator	Plain meaning
ROA	Return on Asset	your total assets	what your entire net worth earned
ROE	Return on Equity	your own equity (total assets − borrowing)	what “your own money” earned — borrowing amplifies it
ROI	Return on Investment	the amount you actually invested	the efficiency of just the money put to work

An example: NT$15M in assets, NT$9M of it borrowed

Say you have NT$6M of your own capital, pledge-borrow up to NT$15M all invested, and make NT$2.1M (14%) in a year:¹

• ROA = 2.1 ÷ 15 = 14% (all assets are working)
• ROI = 2.1 ÷ 15 = 14% (with no idle assets, ROI = ROA)
• ROE = 2.1 ÷ 6 = 35% (only NT$6M is your own → borrowing amplified the return)

This is why “borrow all you can” raises returns: the same NT$2.1M, spread over your own NT$6M, is 35%.

Keep some cash (β < 1) and the three numbers split apart

Now keep NT$2M in cash and invest only NT$13M (β under 1); at the same 14% → NT$1.82M:¹

• ROA = 1.82 ÷ 15 = 12.13% (denominator is all assets)
• ROI = 1.82 ÷ 13 = 14% (denominator is only the NT$13M put to work)
• ROE = 1.82 ÷ 6 ≈ 30.3%

Holding cash lowers ROA (some assets aren’t earning), but that cash is the oxygen that keeps you alive — this is exactly what “trading return for peace of mind” looks like in numbers.

The pitch trap: speculators quote ROI, never ROE

James exposes a common self-inflation: short-term speculators only ever quote ROI, never ROE.¹

• Someone with tens of millions dares invest only NT$100k in short-term trades/options, makes NT$30k, and says “30% return!” — that’s ROI (30 ÷ 100).
• But his ROE = 30k ÷ NT$1M total = 3%. He actually earned 3%.
• Rental property is the same: “I bought for NT$200k and now collect NT$30k rent a year, 30%!” — ignoring how much the property has appreciated and how much capital it ties up.

🔑 One line: to judge investment performance, ask for ROE (what your own money earned), not ROI. Someone who can’t even tell ROE from ROI still has a way to go. The first number Buffett looks at in a business is ROE.

⚠️ Borrowing that amplifies ROE amplifies downside risk and margin-call odds in equal measure (see 質押借款). This page faithfully summarizes CLEC teaching for education only — not investment advice.

Footnotes

1. CLEC James, long session 00501 “Don’t Be Fooled by ROI! How Do You Really Calculate Investment Return?,” 2025-02-08, ROA/ROE/ROI definitions and example @05:30–11:30. Transcript at raw/transcripts/長篇/00501…. ↩ ↩² ↩³ ↩⁴