Return On Assets (ROA) shows how profitable a company's assets are in generating revenue. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Sometimes this is referred to as ROI "Return On Investment".
The formula for Return On Assets is equal to a Fiscal Year’s Net Income divided by Total Assets.
Return on assets is a common figure used for comparing performance of financial institutions (such as banks), because the majority of their assets will have a carrying value that is close to their actual market value. Return on assets is not useful for comparisons between industries because of factors of scale and peculiar capital requirements (such as reserve requirements in the insurance and banking industries).
Return On Equity (ROE) measures the rate of return on the ownership interest (shareholder’s equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are generally considered good.
The formula for ROE is equal to a Fiscal Year’s Net Income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. As with many financial ratios, ROE is best used to compare companies in the same industry.
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