Difference between

1
Difference between

• ROA and ROCE

2
Return on Assets (ROA)

• Most evaluations of profit performance begin with
  the return on assets (ROA) ratio.
• ROA NOPAT/Average Assets
• ROA 127.000 / 905.000 0.1403
  14

3
Return on Assets (ROA)

• 1. A companys sustainable operating profits are
  isolated by removing nonoperating or nonrecurring
  items from reported earnings.
• 2. After-tax interest expense is eliminated from
  the profit calculation so that operating
  profitability comparisons over time are not
  clouded by differences in financial structure.
• 3. Adjustments to eliminate distortions to both
  earnings assets for items such as off-balance
  sheet operating leases.

4
A company can increase its ROA in two different
ways

• 1.By increasing the operating profit margin.
• 2.By increasing the intensity of asset
  utilization.

5
Return on Equity and Financial Leverage

• A. Profitability and credit risk both influence
  the return that common shareholders earn on their
  investment in the company.

6
Return on Equity and Financial Leverage

• B. Return on C/E (ROCE)
• NI available to Common Shareholders
  Avg. Common SE
• This ratio measures a companys performance in
  using capital provided by shareholders to
  generate earnings.

7
Return on Equity and Financial Leverage

• C. Components of ROCE ROCE ROA? common
  earnings leverage ? financial structure
  leverage
• ROCE ROA ? CEL ? FSL
• NOPAT X NI AVAIL. TO COMMON X AVG.
  ASSETS
• AVG. ASSETS NOPAT
  AVG. COMMON SE

8
Return on Equity and Financial Leverage

• The common earnings leverage ratio shows the
  proportion of NOPAT that belongs to common
  shareholders.
• The financial structure leverage ratio measures
  the degree to which the company uses common
  shareholders capital to finance assets.

9
LETS SOLVE OUR PROBLEM

• ROA 127.000 / 905.000 14
• ROCE 66.000 / 478.000 13,8
• CEL 66.000 / 127.000 0,5196
• FSL 905.000 / 478.000 1,8933
• ROCE 0,1403 x 0,5196 x 1,8933 0,1380