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8/13/2019 Question 2 Treasury Management
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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.
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8/13/2019 Question 2 Treasury Management
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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.
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8/13/2019 Question 2 Treasury Management
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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
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8/13/2019 Question 2 Treasury Management
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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.
