In one sentenceOperating profit after Zakat or tax divided by the total amount invested in the business by owners and lenders, measuring how efficiently each financed riyal is used.
Simply put
Return on equity looks at the owners' money alone, and return on assets looks at all assets. This indicator asks: for every riyal that came from the owners or from financing, how much operating profit did it make?
If the return is higher than the cost of capital, the business is creating value; if it is lower, the business is growing but consuming the money of those who financed it.
Worked example
A maintenance company has operating profit of 1,000,000 SAR, assuming a tax rate of 20% for illustration, and is financed by equity of 3,000,000 SAR and financing of 2,000,000 SAR.
Operating profit after tax1,000,000 × (1 − 20%) = 800,000 SAR
Invested capital3,000,000 + 2,000,000 = 5,000,000 SAR
Return = 800,000 ÷ 5,000,00016%
Formula: Operating profit × (1 − tax rate) ÷ (equity + interest-bearing debt)
Don't confuse it with
Return on equityIt divides net profit by the owners' equity alone, so it rises with more debt even if operations have not improved.