Reply to this comment ROA (Return on assets) is a rate that measures the net income...

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ROA (Return on assets) is a rate that measures the net income compared to the total assets. In other words, it shows how much the company is generating for each dollar invested. It is helpful to compare the results of the companies in the market. A company can be very lucrative, but not efficient. It can demand too much investment to obtain that profit.

The ROE (Return on equity) is very similar to ROA, but it includes the debt of the company. It is calculated by dividing the Net Income by the Stakeholder's equity. Since the stakeholder's equity is the total assets minus the debt of the company, this index shows the return compared to the own capital of the company

Expert Solution

"ROA (Return on assets) is a rate that measures the net income compared to the total assets. In other words, it shows how much the company is generating for each dollar invested. It is helpful to compare the results of the companies in the market. A company can be very lucrative, but not efficient. It can demand too much investment to obtain that profit"

This statement is true as ROA is an efficiency parameter that determines how much of returns is generated for every dollar of asset invested. While a company may be generating high profits in its industry, it makes sense to compare it with its competitors on how efficiently it is doing so in generating the high returns. For example a company generating $ 60 of profit for a $ 500 investment is less efficient than a company making $ 20 in a $ 100 investment. ( ROA of company 1 = 60/500 = 12% and ROA for company 2 = 20/100 = 20% ).

Similarly ROE measures the returns this time with respect to the shareholder's equity instead of total assets. This is an efficiency parameter when considering only the equity holders and is a necessary tool to compare multiple companies in the same industry for a given ROE.

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