chryaws
1 Answer
lindilou
http://smallbusiness.chron.com/should-companys-return-assets-greater-its-return-equity-60571.html
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Should a Company's Return on Assets Be Greater Than Its Return on Equity?
by Cam Merritt, Demand Media</header>
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Return on assets and return on equity both give you a sense of how effectively and efficiently a company is using resources to generate profit. Because of how these ratios are calculated, a company's return on assets should be smaller than its return on equity. If return on assets is larger than the return on equity, there's either a mistake in the calculations -- or you're looking at a company in rough shape.
Return on Equity
Return on equity measures how well the company is using its shareholders' or owners' invested money to generate profit. The formula for calculating return on equity for a given period is: ROE = Period Net Income / Average Equity To get the "average equity" figure, add the total value of equity from the beginning of the period to the value from the end of the period, then divide by 2.
Return on Assets
Return on assets tells you how well the company is using its assets -- buildings equipment, cash reserves, inventories and so on -- to produce profit. The formula for calculating return on assets for a period is similar to that for return on equity: ROA = Period Net Income / Average Total Assets To get the "average total assets" figure, add the total value of all company assets from the beginning of the period to the value from the end of the period, then divide by 2.
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| 9 years ago. Rating: 3 | |
