FinAnalysis: ROA and ROE

ROA: return on assets

ROA = Net Income/ Tot. Assets

Definitions:
1. An indicator of how profitable a company is relative to its total assets. -Investopedia.com
2. what the company can do with what it's got - wikipedia

Analyze formula:
this ratio you can find netincome per unit of total assets. Which means how much income have we generated for every unit of assets we consumed in the business or every unit of assets the business has.

Implication:
We can use this ratio to find if company/firm is efficiently using its assets to generate income.
Higher the ROA - better, more income from assets, and company using assets very efficiently to generate their income.


ROE : Return On Equity (basic form)

ROE = Net income/ Total Equity

Definition:
1. A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. -investopedia.com

Analyze ratio:
This ratio divide netincome per unit of equity.

Just like ROA this ratio tells how much income a firm generate per unit of stockholders equity money they have invested in the company. So from a stockholders perspective higher ROE mean the company is generating lot of income from their money. Which is a good thing for investor as it can generate higher return and possible divident for them.

As for the firm, higher ROE mean they are pleasing shareholders and they are using that equity money efficiently to generate income.