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Difference between
ROA and ROCE
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Return on Assets (ROA)
Most evaluations of profit performance beginwith the return on
assets (ROA) ratio.
ROA = NOPATAverage Assets
ROA = !"#.$$$ %$&.$$$= $.!'$= !'
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Return on Assets (ROA)
1. A company’s sustainable operating profits areisolated by
removing nonoperating or nonrecurringitems from reported
earnings.
". After*ta+ interest e+pense is eliminate, fromthe profit
calculation so that operatingprofitabilit- comparisons over time
are notclou,e, b- ,ifferences in financial structure.
. A,ustments to eliminate ,istortions to bothearnings / assets
for items such as off*balancesheet operating leases.
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A company can increase its ROA
in two different ways: – 1.By increasing the
operating
profit margin.
– .By increasing the intensity of
asset utili!ation.
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Return on Equity and Financial Return on Equity and
Financial
Leverage Leverage A. Profitabilit- an, cre,it ris0
both
influence the return that common
sharehol,ers earn on their investment inthe compan-.
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Return on Equity and Financial Return on Equity and
Financial
Leverage Leverage 1. Return on 23 (RO23) =
N4 available to 2ommon 5harehol,ersAvg. 2ommon 53
This ratio measures a compan-6s performance inusing
capital provi,e, b- sharehol,ers togenerate earnings.
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Return on Equity and Financial Return on Equity and
Financial
Leverage Leverage 2. 2omponents of RO237
ROCE = ROA common earnings leverage
financial structure leverage
ROCE = ROA CEL FSL
NOPAT 8 N4 A9A4:. TO 2OMMON 8 A9;. A553T5
A9;. A553T5 NOPAT A9;. 2OMMON53
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Return on Equity and Financial Return on Equity and
Financial
Leverage Leveragea. The common earnings
leverage ratio shows
the proportion of NOPAT that belongs to
common sharehol,ers.
b. The financial structure leverage ratio
measures the ,egree to which the compan-
uses common sharehol,ers6 capital to finance
assets.
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LET’S SOLVE OUR PROBLEM
ROA " #1$.%%% & #'%(.%%% " )1*
ROCE " #++.%%% & #*$,.%%% " !
