Question

ROR vs ROE: Show how it is possible, from a starting point, for one to go up and the other to go down.

Answer 1

ROR or the Rate of Return is defined as follows:

ROI is “Returns generated from investment” - The “cost of investment” and divded by “cost of investment” as a percentage. This is a very simple form of the returns equation

ROE or the Return on Equity is defined as follows:

Return on Equity - Caculates the Y-o-y returns generated on investments made by the Equity holders of the company.

For public companies - ROE will be the returns generated on the Average Market cap of the company

ROR will be the returns generated on the Total Asset base of the company.

Hence since market capitalization tends to be much higher, ROE is lower in the case of public companies vs the Return on Assets of the firm.