What happens to ROA / ROE / ROIC if the company needs additional funding, which it...

What happens to ROA / ROE / ROIC if the company needs additional funding, which it raises through additional equity ?

Solutions

Expert Solution

When additional capital is raised through additional equity, the main parameter that is being impacted at the time the equity is raised is the Equity component (where we still do not know for what the additional equity is used yet (if for purchase of additional assets or for some other cash flow needs)). As we still do not know if the additional funding has any impact on the return, we can only assume that the return has not yet changed yet.

Thus among the parameters mentioned above,

ROA: return on asset is not impacted as the return and assets as assumed above has not changed.

ROE: return on equity has decreased as the return has not changed but equity has increased ( higher denominator than earlier)

ROIC: return on invested capital has decreased as the the return has not changed and the jnveste capital has increased ( due to increased invested equity which is additional invested capital). Thus increased denominator has decreased the ratio amount.

Thus ROA is unchanged and ROA & ROIC decreases.

jeff jeffy answered 2 hours ago

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