Final answer:
A company's ROE might be higher than its ROI if the company has taken on significant debt at a cost that is lower than the return required by equity investors, using this leverage to amplify earnings relative to the shareholders' equity.
Step-by-step explanation:
A company's return on equity (ROE) and return on investment (ROI) are two distinct financial metrics used to evaluate a company's financial performance. ROE measures the profitability relative to shareholder equity, while ROI evaluates the profit generated from an investment relative to its cost. A scenario where a company's ROE is higher than its ROI can occur when the company has significant debt leverage. In essence, if the company uses debt to finance its operations, it can achieve a higher ROE compared to ROI especially if the company's cost of debt is lower than its investors' required rate of return on equity, amplifying the earnings attributable to shareholders' equity through the use of debt. Conversely, if a company's ROI is lower than its cost of debt, the company is not generating enough return on its investments to cover the cost of borrowing, which could negatively impact both ROI and ROE, but not necessarily cause ROE to be higher than ROI.