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Difference between

Difference between. ROA and ROCE. R eturn on A ssets (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. R eturn on A ssets (ROA).

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Difference between

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  1. Difference between ROA and ROCE

  2. Return on Assets(ROA) Most evaluations of profit performance begin withthereturn onassets (ROA) ratio. • ROA = NOPAT/Average Assets • ROA = 127.000 / 905.000 = 0.1403 = %14

  3. Return on Assets(ROA) • 1. A company’s 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 company’s 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 NOPATX NI AVAIL. TO COMMON X AVG. ASSETS AVG. ASSETS NOPAT AVG. COMMONSE

  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. LET’S 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

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