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8/13/2019 Question 2 Treasury Management
1/4
According to Investopedia, the Return on Assets is an indicator of how profitable a
company is relative to its total assets. The main idea of the return on assets is to show how
efficient management is at utilizing its assets to generate income. The ROA is calculated by
dividing a company's annual earnings by its total assets and is displayed in percentage. The ROA
is sometimes called the Return on Investment.
FORMULA
Return on Asset = Net Income
Total Assets
CALCULATION
Super Limited has a net income of $5 million and total assets of $20 million, its ROA is 25%.
Nitro Limited earns the same net income of $5 million and has total assets of $40 million, its
ROA is 12.5%.
Super Limited has the higher ROA meaning it is better at converting its investment into profit.
The ROA generally gives investors an idea of how effectively the company is converting
the money it has to invest into net income. The higher the ROA number, the better, because the
company is earning more money on less investment.
8/13/2019 Question 2 Treasury Management
2/4
According to Investopedia, the Return on Equity is the amount of net income returned as a
percentage of shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have invested. The
ROE compares a companys profitability to other firms in a particular industry.
FORMULA
Return on Equity= Net Income
Shareholders Equity
CALCULATION
Super Limited has a net income of $5 million and their shareholders equity totaled $40 million,
its ROE is 12.5%.
Nitro Limiteds Net Income of $5 million and shareholders equity of $20 million resulting in a
ROE of 25%.
These results indicate that Nitro Limited having the higher ROE is more efficient generating
income on new investment.Investors should compare the ROE of different companies and also
check the trend in ROE over time.
ROE and ROA are both measures of profitability, though ROE focuses on the return to
the owners investment while ROA emphasizes the return on the assets under management.
8/13/2019 Question 2 Treasury Management
3/4
INSURED DEPOSITORS
ROA
ROE
The return on equity helps to pay financial returns to insured depositors for the use of the
business capital. Higher equity returns are more favourable to these depositors than smaller
returns.
SHAREHOLDERS
ROA
ROE
The ROE tells common shareholders how effectively their money is being employed.
Shareholders cant expect high returns in the long term if the ROE is low.Companies with low
ROE should be handing back profits to shareholders by invoking high payout ratios since
retaining earnings to magnify poor performance will destroy value.
BANK MANAGEMENT
ROA
8/13/2019 Question 2 Treasury Management
4/4
The ROA is an indicator on how efficiently a bank is being runand is t is intended to measure
the operational efficiencyof the bank
ROE
ROE that involves the consideration of thebank owners returns on their investment.
Management needs to know that the returns made on the initial capital invested is substantial
manly to avoid suffering from low income in the future and not being able to pay for the
businesses expenses. Management is concerned with the Return on Equity on an investment to
determine the amount that will be paid to investors for the use of the capital.