Making the leap from ROI to ROA…

One of the goals at Juno Capital Strategy, LLC is to broaden the definition of success. We consider ALL of your assets, in measuring success, not just your investable assets. The difference between ROI and ROA.

Let’s begin with a definition of terms. ROI stands for Return on Investment. ROA stands for Return on Assets. These terms get tossed about in finance and accounting as measures of performance, alongside ROE (Return on Equity), ROR (Return on Revenue) though it can also be used to mean Rate of Return. Adding to the confusion, you may hear terms such as: geometric return, arithmetic return, time-weighted return, dollar-weighted return, rolling return, absolute return, let’s not forget IRR (Internal Rate of Return), and my personal favorite: Total Return. You can bet we will return (hah! see what I did, there?) to this topic in a future note. Until then, whew! That’s a lot of “R.” Is it any wonder so many of us simply throw our hands up, and put our heads down, while we walk away? Why we don’t ask questions and just “pick one with the highest number”?

Alas.

Given all the ways to view and calculate returns, why am I calling out and spelling out ROI and ROA? Because so much of the financial industry focus is spent on measuring, calculating, distilling down to a number. But, we know that a number without context doesn’t hold much meaning.

Twenty-seven! I got twenty-seven!

Is that good? Is that bad?

We have no idea without context. So, where do we get context?

Another number? Another number! Here you go: a benchmark! Ta-dah! You got 27. Uh-oh, the benchmark is 50. That does not seem so good. Or, the benchmark is 28. Ok, that seems good. Or, wait, it can get “even better” the benchmark is 20. You “beat” the benchmark! Huzzah!

But…

what if…

what if that is not the correct benchmark?

I am not talking: we used the FTSE where we need to be using MSCI. That is like being in the correct theater, but in the wrong row, as my Dad would say. I mean: What if we aren’t supposed to be in that theater? What if we aren’t supposed to be in a movie theater, but a live theater, instead? What if we aren’t even supposed to be in a theater, at all?

This is the difference between ROI and ROA. In ROI, we are racing around comparing seat numbers inside a movie theater. In ROA, we want to know about the WHOLE mixed-use area, which includes: a multiplex of 8 theaters, a black-box live theater, an outdoor amphitheater, some restaurants, some boutiques, a couple of banks and a small hotel. That’s right, what was going on in ALL of those spaces. If we only focus on the multiplex activity, we may miss all the other good happening in the surrounding assets. Our ROI can contribute to our ROA. I hope you see where I am going: broadening the definition of success, because we need more than just ROI. And, yes, if you suspect this is another note leading up to The Time Value of Money note, then you get a gold star! Because it is leading to just that. I promise, we are going to get there.

Here’s my point with this note: when we broaden our definition of success to include and consider all of our assets, we get a much clearer picture of our real progress toward our goals. And, we don’t worry so much about what Jane is doing over in the multiplex, in theater 3, seat 7 or what Mary is doing over in the amphitheater row 7, seat 3, because we are where we want to be, enjoying a latte in the café across the street. This is not to say ROI is not important, it is very important, but it offers limited information, and that information without context does us no good. Of equal importance, the context is not defined by Jane or Mary, it is defined by YOU!

What do YOU need from YOUR assets? What works best for YOU?

Just as we discussed in our January 2021 note, it is YOUR context that matters. YOUR ROA. When you are getting what you need from your assets, all of your assets, not only your investments, it doesn’t matter what Jane or Mary are doing. Not in a mean-girl way, but in a “good for you, over there, doing your thing” way. Meanwhile, you are over here, doing YOUR thing, lighting up YOUR world the way YOU need, the way YOU want, with YOUR assets working consistently and cohesively, for YOU.

And THAT, is real success!

If that is not how you are feeling about your ROA, then Let’s Talk!