Bookkeeping
Accounting
Finance
Taxes
ROE, ROA and ROI: The Three Return Ratios Every Entrepreneur Should Know
Learn the difference between ROE, ROA and ROI, and discover how these three financial ratios help Dutch entrepreneurs evaluate profitability, efficiency and investment decisions.
•
15 mins
Intro
Most Dutch entrepreneurs can tell you their annual revenue and roughly what their profit margin is. Far fewer can answer a more important question: is my business actually generating a good return on everything I've invested in it? Revenue shows how large your business is. Profit margin tells you how efficiently you convert sales into profit. Neither reveals whether the money, time and assets invested in building your business are producing a worthwhile return.
That is exactly what ROE, ROA, and ROI measure. These are not complicated financial metrics reserved for listed companies or investment analysts. They are practical management tools that help every entrepreneur, whether you run a BV or an eenmanszaak, understand where value is being created, where capital is underperforming, and where improvements should be made. Once you understand how these three ratios work together, your financial statements stop being historical reports and become decision-making tools.
What These Three Ratios Actually Tell You
Revenue tells you how much your business sells.
Profit margin tells you how much of those sales become profit.
Neither tells you whether your company is generating an attractive return on the capital invested to build it.
Imagine two companies each earning €100,000 in annual profit.
At first glance, they appear equally successful.
However:
Company A required only €300,000 to build.
Company B required €2 million of investment.
Although both businesses earn identical profits, Company A generates a far stronger return for its owner.
This is precisely where ROE, ROA, and ROI become valuable.
Each ratio answers a different question.
ROE (Return on Equity) measures how effectively your own invested capital generates profit.
ROA (Return on Assets) measures how efficiently all company assets generate profit, regardless of whether they were financed with equity or debt.
ROI (Return on Investment) measures whether a specific investment, project or business decision produced an acceptable return.
Together they provide a complete picture that revenue and profit margin alone simply cannot offer.
Rather than looking only at how much money your business earns, they help answer whether your business is using its capital efficiently.
Before calculating these ratios, it's important to understand the figures on your company's balance sheet in the Netherlands, since equity, assets and profit all originate from your annual financial statements.
ROE: Return on Equity, Are You Earning Enough on Your Own Capital?
For many founders, ROE is the single most important financial ratio.
After all, every entrepreneur asks the same underlying question:
"Am I earning enough on the money I've invested in my business?"
ROE provides the answer.
Formula
ROE = (Net Profit ÷ Total Equity) × 100%
Total equity represents everything that belongs to the owner:
Paid-in share capital
Retained earnings
Company reserves
Suppose your BV has:
Total equity: €60,000
Annual net profit: €15,000
Your ROE becomes:
(15,000 ÷ 60,000) × 100 = 25%
This means that every euro invested by the shareholders generated 25 cents of profit during the year.
That number becomes much more meaningful when compared to the alternatives.
If the same €60,000 had remained in a savings account earning approximately 2% interest, it would have generated only €1,200.
The business, by comparison, generated €15,000.
Assuming the risks are acceptable, the company is creating substantially more value than leaving the capital invested elsewhere.
Typical Dutch SME Benchmarks
Although every industry differs, the following ranges provide useful guidance.
Sector | Typical healthy ROE |
IT, consulting and professional services | 25%–50%+ |
General service businesses | 15%–30% |
Retail | 10%–20% |
Manufacturing and logistics | 8%–15% |
Real estate and other capital-intensive businesses | 5%–12% |
These benchmarks should never be viewed as absolute targets.
Capital-intensive businesses naturally require more investment to generate profit, resulting in lower ROE figures.
Consulting firms, software companies and many service businesses often achieve much higher returns because relatively little capital is required to operate.
A consistently low ROE should prompt an important question:
"Would my invested capital earn a better return elsewhere at a similar level of risk?"
If the honest answer is yes, the business may be destroying shareholder value rather than creating it.
Another factor that affects ROE is how profits are retained or distributed. Decisions around DGA salary versus dividend influence the level of retained earnings on the balance sheet and therefore affect your ROE over time.
Unlike many financial ratios, ROE doesn't simply tell you whether your business is profitable.
It tells you whether being an entrepreneur is actually rewarding the capital you've invested.
ROA: Return on Assets, How Hard Is Your Business Working?
While ROE focuses on the return generated from the owner's capital, ROA looks at the efficiency of the business as a whole.
Instead of asking how well your own investment performs, ROA answers a different question:
"How effectively is the entire business using all of its assets to generate profit?"
This distinction is important because businesses are rarely financed using equity alone. Most companies combine shareholder capital with bank loans, leases or other forms of financing. ROA removes this distinction and measures the productivity of everything the business owns, regardless of how those assets were funded.
Formula
ROA = (Net Profit or EBIT ÷ Total Assets) × 100%
Many financial analysts prefer using EBIT (Earnings Before Interest and Taxes) because it removes the effects of financing choices and taxation, making companies easier to compare. For many SME founders, however, using net profit is perfectly acceptable as long as the calculation remains consistent over time.
Imagine your BV has:
Total assets: €120,000
Annual net profit: €15,000
The calculation becomes:
(15,000 ÷ 120,000) × 100 = 12.5%
This means every euro invested in the company's assets generated 12.5 cents of annual profit.
ROA is particularly useful when comparing businesses within the same industry.
For example, two consulting firms may both report an ROE of 25%, but if one has an ROA of 20% and the other only 10%, the difference often comes down to financing. The second business may rely much more heavily on borrowed money.
This brings us to one of the most important relationships in financial analysis.
Understanding the Leverage Effect
Whenever a company uses debt to finance part of its assets, ROE will usually be higher than ROA.
Why?
Because ROE only measures the return on the owner's equity, while ROA measures the return on all assets, including those financed with loans.
Imagine two identical businesses.
Both generate:
€15,000 net profit
€120,000 in total assets
The first company is entirely financed by equity.
The second company has:
€60,000 equity
€60,000 bank loan
Their ROA remains identical because both businesses generate the same return on the same assets.
However, the second company's ROE becomes significantly higher because the same profit is generated using a smaller amount of shareholder capital.
A widening gap between ROE and ROA therefore signals increasing financial leverage.
That is not automatically a bad thing.
If your business earns a higher return on its assets than the interest rate paid on borrowed money, debt can amplify shareholder returns. On the other hand, excessive leverage also increases financial risk during periods of lower profitability or rising interest rates.
Rather than looking at ROE or ROA in isolation, successful founders monitor both ratios together to understand not only profitability, but also the level of financial risk supporting those returns.
ROI: Return on Investment, Does This Decision Actually Pay Off?
Unlike ROE and ROA, which evaluate the performance of the business as a whole, ROI focuses on individual investments.
Every entrepreneur makes investment decisions.
Should you hire another employee?
Launch a marketing campaign?
Buy new software?
Purchase machinery?
ROI helps answer one simple question:
"Will this investment generate enough value to justify its cost?"
Formula
ROI = ((Return from Investment − Cost of Investment) ÷ Cost of Investment) × 100%
Because ROI can be applied to almost anything, it is arguably the most flexible of the three return ratios.
Example 1: Marketing Campaign
A BV spends €8,000 on an online marketing campaign.
The campaign generates:
€24,000 in additional revenue.
Gross profit margin: 40%.
The financial return equals:
€9,600
The ROI becomes:
((9,600 − 8,000) ÷ 8,000) × 100 = 20%
The campaign generated a positive return and created additional value for the business.
Example 2: New Equipment
A manufacturer invests:
€15,000
in new production equipment.
The equipment reduces production costs by:
€4,500 per year
After three years, total savings equal:
€13,500
The ROI becomes:
((13,500 − 15,000) ÷ 15,000) × 100 = -10%
Although the investment has not paid for itself after three years, extending the time horizon may completely change the conclusion. This illustrates why ROI should never be interpreted without considering the expected lifespan of an investment.
The ROI Most Founders Never Calculate
Most articles treat ROI purely as a way to evaluate financial investments.
For founder-led businesses, there is another perspective that is often even more valuable.
Consider a DGA who:
Invests €100,000 to establish a BV.
Works 60 hours per week for five years.
Pays themselves the required DGA salary.
Ends up with a company generating €30,000 in annual distributable profit.
On paper, the business may appear profitable.
But when both the founder's invested capital and thousands of hours of personal effort are taken into account, the actual return may be far less attractive than expected.
Thinking about ROI in this broader sense helps founders answer difficult strategic questions.
Should you continue investing?
Should you scale?
Should you automate?
Or would your capital, time and expertise generate a better return elsewhere?
This is why ROI should never be viewed as just another accounting metric. It is a decision-making tool that helps entrepreneurs allocate both money and time more effectively.
Reading All Three Ratios Together on the Same Company
The real value of ROE, ROA, and ROI doesn't come from calculating them individually. Their true power lies in reading them together.
Each ratio answers a different question, but together they tell the complete financial story of your business.
To see how this works, let's apply all three ratios to the same company.
Worked Example
Company Profile
Dutch IT consulting BV, Year 3
Annual revenue: €280,000
Net profit: €42,000
Total equity: €90,000
Total assets: €160,000
Outstanding bank loan: €70,000
Step 1: Calculate ROE
ROE = (42,000 ÷ 90,000) × 100 = 46.7%
This is an outstanding result by almost any SME benchmark.
The shareholders are generating nearly 47 cents of profit for every euro of equity invested, indicating that the business is creating significant value.
Step 2: Calculate ROA
ROA = (42,000 ÷ 160,000) × 100 = 26.3%
This shows the business is using its total assets very efficiently.
Whether those assets were financed through equity or debt, they are generating a strong return.
Step 3: Compare ROE and ROA
The difference between the two ratios is:
46.7% − 26.3% = 20.4 percentage points
That gap immediately tells us something important.
The company's €70,000 bank loan is increasing the return on shareholders' equity.
Because the business earns a substantially higher return than the interest paid on the loan, financial leverage is working in the founder's favour.
Had the company financed all of its assets using equity instead, the business would be less risky, but the ROE would also be considerably lower.
Step 4: Calculate ROI on a Recent Investment
The company recently invested:
€12,000
in new project management software.
The software increased billable capacity, generating:
€18,000 in additional annual revenue.
Profit margin: 50%.
Annual return:
€9,000
The ROI becomes:
((9,000 − 12,000) ÷ 12,000) × 100 = -25%
At first glance, this looks disappointing.
However, software is rarely purchased with only a one-year horizon.
If the software continues generating similar returns during the second year, the investment becomes profitable.
This demonstrates why ROI should always be interpreted within the expected lifetime of the investment.
Reading the Story Behind the Numbers
Looking at all three ratios together paints a much richer picture than any single metric could provide.
ROE shows the shareholders are earning an exceptional return on their capital.
ROA confirms the business itself is highly efficient.
The gap between ROE and ROA shows that debt is being used productively rather than creating unnecessary risk.
ROI reveals that while the company is performing strongly overall, not every investment pays off immediately.
This is exactly why experienced founders rarely rely on one financial ratio in isolation.
When used together, these metrics help explain not only how well your business performs today, but also why it performs that way and where future improvements can be made.
If you're unsure where to find the figures needed for these calculations, understanding how to prepare a balance sheet is an excellent place to start.
What to Do When Your Ratios Are Too Low
Calculating financial ratios is only useful if they lead to better decisions.
If one of your return ratios consistently falls below expectations, the next step is identifying which part of the business needs improvement.
Each ratio points to a different management lever.
When ROE Is Low
A low ROE usually means the business is generating too little profit relative to the owner's invested capital.
Possible improvements include:
Increasing revenue.
Improving pricing.
Reducing operating costs.
Using debt strategically to finance growth instead of relying solely on equity.
However, borrowing money should never be the first solution.
If profit margins are already weak, additional debt simply increases financial risk without solving the underlying issue.
When ROA Is Low
A low ROA suggests your assets are not working hard enough.
Review whether your business has:
Underutilised equipment.
Slow-moving inventory.
Excessive accounts receivable.
Large cash balances earning little or no return.
For example, a BV holding €50,000 in cash that remains unused for years may be reducing overall ROA unnecessarily.
Sometimes deploying that capital into growth initiatives, investments or even distributing excess funds is a more effective use of resources.
When ROI Is Low
A disappointing ROI usually means a specific investment has not performed as expected.
Before abandoning the investment entirely, ask yourself:
Were the original revenue forecasts realistic?
Has enough time passed for the investment to generate returns?
Should additional investment be stopped?
Would those funds produce a better return elsewhere?
One of the most important lessons is that financial ratios improve not only by increasing profit.
They also improve by managing the denominator.
A company that maintains the same profit while reducing unnecessary assets, lowering excess equity or investing capital more efficiently can improve ROE, ROA and ROI without increasing revenue at all.
If you're unsure where to start, working with an experienced accountant or bookkeeper can help identify which ratio deserves your attention first and what actions will have the greatest financial impact.
Better Decisions Start With Better Financial Insight
Revenue tells you how large your business has become.
Profit margin tells you how efficiently you generate profit.
ROE, ROA and ROI tell you whether your business is actually creating value.
Together, these three ratios help founders understand how effectively they use shareholder capital, company assets and individual investments. They turn financial statements into practical management tools that support smarter decisions about growth, financing and future investments.
At Neno, we go beyond preparing financial reports. We help entrepreneurs understand what the numbers actually mean, using AI-powered bookkeeping, payroll, tax services and proactive financial insights to support better decision-making.
Whether you're analysing profitability, preparing for investment or simply looking to improve your company's financial performance, we're here to help.
Ready to gain better insight into your business performance? Explore our bookkeeping and payroll services or book a demo to see how Neno helps founders make more informed financial decisions.
Frequently Asked Questions
What is the difference between ROE and ROA?
ROE measures the return generated on shareholders' equity, while ROA measures the return generated by all company assets, regardless of whether they were financed through equity or debt.
What is considered a good ROE for a Dutch small business?
It depends on the industry. As a general guideline, Dutch service businesses often achieve 15% to 30%, while consulting and IT companies regularly exceed 25% because they require relatively little capital.
Can I calculate ROI on my own time as a DGA?
Yes. Although ROI is traditionally used for financial investments, many founders also evaluate the return on the time and capital they invest in building their company. This provides a more realistic view of whether entrepreneurship is generating sufficient value.
Why is my ROE higher than my ROA?
This usually indicates your business uses debt to finance part of its assets. Borrowed capital reduces the equity base, which increases ROE as long as the business earns more than the cost of that debt.
How often should I calculate these ratios?
Most businesses calculate them at least once a year using their annual financial statements. Growing companies often review them quarterly to monitor performance more closely.
Do these ratios apply only to a BV?
No. Although they are frequently discussed in relation to a BV, ROE, ROA and ROI are equally useful for sole proprietorships, partnerships and other business structures.
What is EBIT, and why is it sometimes used for ROA?
EBIT (Earnings Before Interest and Taxes) removes the effects of financing and taxation, making it easier to compare businesses with different capital structures. Many analysts therefore prefer EBIT when calculating ROA, although using net profit is also common as long as calculations remain consistent over time.
Written by
Nick Knuppe
CEO & Founder
