ROE, ROA, Margins & Debt-to-Equity
How efficiently the business turns resources into profit — and how much borrowed fuel is behind it.
The StatementsBeginner 7 min read· Lesson 4 of 4 in Company Fundamentals
Returns on capital
ROE = net income ÷ equity (returns on the owners' stake); ROA = net income ÷ assets (returns on everything deployed). Consistently high ROE (15%+) WITHOUT heavy leverage is the fingerprint of a moat. The catch: debt mechanically inflates ROE by shrinking the equity base — always read ROE beside the balance sheet.
Margins
Gross margin reveals pricing power; operating margin, discipline; net margin, the final take. LEVELS vary by industry (groceries 2%, software 30%) — TRENDS are universal: steadily eroding margins signal competition winning.
Debt-to-Equity
D/E = total debt ÷ equity: the leverage dial. Leverage amplifies both directions and adds a clock (maturities) and a covenant regime. High-D/E cyclicals are the classic recession casualties; check interest coverage (operating income ÷ interest) for the survivability read.
Free cash flow
FCF = operating cash flow − capex: cash the business truly throws off after maintaining itself — what funds dividends, buybacks, and debt paydown without dilution. Persistent FCF is the least fakeable quality signal in this course.