San Antonio Business Daily

A company has a return on assets ratio of 12%?

If the debt to total assets ratio is 40%, what is the return on equity? If the firm had no debt, what would the return on equity ratio be?

Public Comments

1. Why do you want to know? Are you comparing this company to another company for purposes of investing? A ROA of 12% might be excellent for some industries, but on the low end for others. I tend to ignore ROE numbers because they include intangibles and goodwill (which can be anything the company wants them to be and are extremely hard to evaluate fairly). If you want to quickly judge the financial strength of a company, look at their debt levels, their operating profits and their cash flows from operations. Are their debt levels low and decreasing and are their profits and cash flow increasing? Are they not getting carried away with selling too much stock to fund operations? And finally, how's the stock price appreciating over time? Is it nice and steady growth?
2. RoA = Net earnings/Assets = 0.12, so Net earnings = 0.12Assets Debt to Assets ratio = Liabilities/Assets = 0.40, so Liabilities = 0.40Assets RoE = Net earnings/Stockholders' Equity but SE = Assets - Liabilities, so RoE = Net earnings/(Assets -Liab) Substituting for the above, RoE = 0.12Assets/(Assets - 0.40Assets) RoE = 0.12Assets/0.60Assets RoE = 0.20 or 20% If there is no debt, RoE = Net earnings/Assets which is the same as RoA, which is 12%