Which metrics are commonly used to evaluate the profitability of a loan product?

• A. Net present value
• B. Earnings before interest and taxes (EBIT)
• C. Return on equity (ROE), return on assets (ROA), and risk-adjusted return on capital (RORAC)
• D. Price-to-earnings ratio

Answer: (C)

Profitability for a loan product is best judged by returns generated relative to the capital and risk tied to that product. ROE shows how much profit is earned on the equity invested, indicating overall profitability from the owners’ perspective. ROA measures how efficiently the assets (including the loan portfolio) generate profits, giving a broad view of asset-level performance. RORAC adds the risk dimension, assessing returns per unit of risk capital allocated to the loan product, which is crucial in lending where credit risk and capital requirements vary across products. Together, these metrics give a clear picture of how profitable a loan product is after accounting for both capital and risk.

Net present value is a project-focused, cash-flow-based measure and isn’t a standard ongoing product-profitability metric. EBIT reflects operating income before financing and taxes, but it ignores the cost of equity, financing structure, and credit losses intrinsic to lending. The price-to-earnings ratio is a market-valuation metric for whole companies, not a direct measure of a single loan product’s profitability.