Which is a more meaningful measure of profitability for a firm - return on assets (ROA)...

Which is a more meaningful measure of profitability for a firm - return on assets (ROA) or return on equity (ROE)? Why?

(Thanks)

Expert Solution

Return on asset is a better measure of overall calculation of the profitability of the company because it will be identifying how better the company is effectively using its resources in order to generate more profit for its shareholders whereas return on equity is generally associated with the overall rate of return which is being provided to the equity shareholders and it is confined to the equity shareholders only so it is a very concentrated approach.

Return on asset is having a more wider perspective and they are trying to ascertain the overall efficiency in the use of the Assets of the company and they are also deriving all such return which is applicable to the debt holders as well as this shareholder, so they are trying to provide a very enlarged view of the total performance of the company and they are not just confined to the equity stake so they are offering with the maximization of the rate of return on the overall company front rather than just shareholders perspective

Hence, I will be preferring return on assets.

jeff jeffy answered 3 years ago

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