Correction

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What is the correct sentence

See example:

Although ROE is a good indication of profitability, the return of assets (ROA) is a better indication because it does not depend on how the company is financed.
asked Nov 06 '13 at 20:54 Oye Balogun New member

1 answer


1

ROA stands for return on, not of, assets. 

 

The biggest problem with the sentence is that it is not factually correct. 

 

When you discuss a method of financing, we assume that you mean debt.  Individual stockholders may have personally financed their investments, but equity is a fixed amount that the stockholders invested.  The ROE will not change if a debt-free company decides to take out a loan. 

 

ROA, on the other hand, does change when a company has debt.  The cash (or equipment bought with the cash) from a loan becomes an asset.  “How the company is financed” directly affects this ratio.  You have stated the opposite.

 

It is also arguable that ROA is a “better indication” than ROE for profitability.  In one way, ROA is better.  In another way, ROE is better.  It depends on the perspective and having knowledge of the entire financial picture.  A wise business owner will look at both.

link comment answered Nov 06 '13 at 23:54 Patty T Grammarly Fellow

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