Question

1) Based on the calculation , discuss relationship between ROA anfd ROE

	A company	Z company
Average of ROA	12%	10%
Standard deviation of ROA	5.89%	5.57%
Standard deviation of ROE	8.45%	7.13%

2) which company has higher ROE and what is the reason of it?

3) which company has more volatility of roe and what is the reason of it ?

Answer 1

1. Return on assets and Return on equity will mostly be having a positive relationship and when the return on asset will be higher, it will mean that the assets are used efficiently by the company, so Return on equity will be most probably higher if the debt financing is properly managed.

In this case, it can be seen that there is an average of Return of asset which is higher for company A than company Z. So it can be said that Return on asset will be leading to efficiently use of the Assets of the company in order to maximize the profit of the company and return on equity are only calculated after payment of tax and interest as well as also additional payments, so if interest payments and expenditures are managed properly and efficiently, it would mean that the return on equity will also be higher for company A than company Z, and if the the standard deviation is also higher, it would mean that these return on equity are subject to fluctuations from their mean