When an investor or a private equity fund evaluates an opportunity, one of the first questions they ask is: what return will I get on my capital?. To answer it rigorously, professionals use a set of return ratios that measure, from different angles, a company's ability to generate profit.
In this guide we explain the 5 key ratios — ROI, ROIC, ROA, ROE, and ROMI — how to calculate them with practical examples, and how they're used in M&A deals to value companies.
Why return ratios are key in M&A
In any business sale, buyers don't just look at EBITDA or sector multiples. They also analyze how efficiently the company turns capital into profit: how much its assets, equity, invested capital, and marketing campaigns return.
A company can have an attractive EBITDA but low return ratios, which points to efficiency problems: too many assets for the profit it generates, too much tied-up capital, or investment decisions that don't pay off. These findings translate directly into valuation adjustments during financial due diligence.
That's why understanding and optimizing these ratios before starting a sale process is one of the most underrated levers for improving the final valuation.
The 5 ratios for measuring return on investment
There are many profitability indicators, but these five are the most widely used in financial analysis and M&A deals:
1. ROI (Return on Investment)
ROI measures the return obtained on the cost of a specific investment. It's the most general ratio and applies to any type of investment: a machinery purchase, a commercial project, an acquisition.
ROI = ((Profit − Cost of investment) / Cost of investment) × 100
Example: a company invests €100,000 in new industrial equipment and, thanks to it, generates an additional profit of €130,000 over two years. Its ROI is: ((130,000 − 100,000) / 100,000) × 100 = 30%.
A positive ROI indicates a gain. A negative ROI indicates a loss. How it's interpreted depends on the time period and the risk taken on.
2. ROIC (Return on Invested Capital)
ROIC measures the return generated on the total capital invested in the company (equity + debt). It's one of the ratios most used by private equity funds because it reflects the overall efficiency of capital.
ROIC = (NOPAT / Invested capital) × 100
Where NOPAT is net operating profit after tax, and invested capital is the sum of equity and net debt.
Example: a company with €200,000 in NOPAT and €1,000,000 in invested capital has an ROIC of 20%. If its weighted average cost of capital (WACC) is 8%, it's creating real value for investors.
3. ROA (Return on Assets)
ROA measures the return obtained on the company's total assets. It shows how much net profit is generated for every euro of available assets, without distinguishing whether they're financed with equity or debt.
ROA = (Net profit / Total assets) × 100
Example: a company with €150,000 in net profit and €2,000,000 in assets has an ROA of 7.5%. It's an especially useful indicator for comparing companies within the same sector.
4. ROE (Return on Equity)
ROE measures the return on the company's equity. It answers the question: how much is the shareholders' money earning?
ROE = (Net profit / Equity) × 100
Example: a company with €200,000 in net profit and €1,000,000 in equity has an ROE of 20%. It's one of the ratios most closely watched by individual investors and family offices because it directly reflects the performance of their investment.
⚠️ Watch out: a high ROE can be the result of a high level of debt (little equity relative to total assets). That's why it's always analyzed alongside ROA and solvency and liquidity ratios.
5. ROMI (Return on Marketing Investment)
ROMI measures the return generated by specific marketing investments. Although it's more operational than financial, it's increasingly relevant in M&A deals: buyers want to know whether growth comes from efficient investment or from expensive customer acquisition.
ROMI = ((Revenue generated by marketing − Marketing cost) / Marketing cost) × 100
Example: a €50,000 campaign that generates €200,000 in directly attributable revenue has a ROMI of 300%. In other words, every euro invested generated 3 euros in return.
How to interpret these ratios in an M&A deal
In the context of a business sale, return ratios provide information that complements EBITDA multiples and discounted cash flow (DCF):
- They identify efficient companies: consistently high ratios over time point to solid management and a robust business model. These companies usually command higher multiples.
- They uncover hidden inefficiencies: a low ROIC in a company with a good EBITDA can reveal excess assets or poor investment decisions.
- They compare companies within the same sector: ROA and ROE enable objective benchmarking among competitors.
- They flag risks early: an ROE that's artificially high because of heavy debt can be a red flag for future solvency.
That's why professional investors never look at a single ratio in isolation. They combine return ratios with analysis of operating margin, free cash flow, and solvency and liquidity ratios to build a 360º view of the company.
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What counts as a good ratio by sector
Ratios should always be interpreted in their sector context. These are the indicative ranges for considering each ratio healthy:
- ROI: it depends entirely on the project. An ROI above 15%–20% a year is generally considered attractive.
- ROIC: it should be higher than the WACC (weighted average cost of capital). In Spain, an ROIC of 10%–15% is good; above 20% is excellent.
- ROA: it varies widely by sector. Technology companies can exceed 15%; industrial companies are usually in the 5%–10% range; retail in the 3%–7% range.
- ROE: the historical benchmark is 15%. Below 8% usually points to efficiency problems or overcapitalization; above 25% it's worth reviewing the debt level.
- ROMI: a good ROMI is above 200%–300%. In sectors with long sales cycles, it's assessed over 12–24 months.
These ranges are a starting point. The final interpretation always depends on the company's business model, point in the cycle, and strategic objectives.
Frequently asked questions about return ratios
Which ratio is most important for evaluating a company?
It depends on the type of investor. Private equity funds tend to prioritize ROIC (efficiency of total capital). Individual investors look at ROE (return on their capital). Strategic buyers place more weight on ROA (operational efficiency). Ideally, you analyze them together.
Can a company have a high ROE and a low ROA at the same time?
Yes, and it usually points to high debt. If the company finances a large share of its assets with debt, equity is small and ROE can be artificially inflated. That's why ROE and ROA should always be analyzed together to detect this effect.
How can you improve these ratios before selling a company?
To improve ROA and ROIC: sell non-strategic assets, optimize inventory, and reduce unnecessary tied-up capital. To improve ROE: review the debt and capital structure. To improve ROMI: audit campaigns, cut unprofitable channels, and improve attribution. These optimizations can be made in the 12–18 months before the sale process.
How do these ratios relate to EBITDA?
They're complementary. EBITDA measures absolute operating profitability (how much the business generates). Return ratios measure relative efficiency (how much it returns for every euro invested). A company with a good EBITDA but low return ratios may have efficiency problems that affect its final valuation.
