what is the difference between ROI and ROA

Question

Hello everybody, I am new to bp, but I love the site, can some one  explain the difference between return on investment(ROI) and return on asset(ROA)? thanks.

Ralph S. · Answer

The difference is what you divide income by, Investment (owners equity) or Assets.

In an over-simplified example, you buy a property for $100k, put $20k down, and take a mortgage for $80k.  Your balance sheet would look like:

Assets, 100k
Liabilities, $80k
Owners Equity, $20k.

You cruze through your first year and make $5k.

ROI = $5k/$20k = 25%
ROA = $5k/$100k = 5%

Again, this is a simple example.

Ralph