Question

Select a company and study their latest annual report.

Based on the report, comment on the performance of the company using the ratio analysis.

Explain your findings concentrating on the ROA(RETURN OF ASSETS) and ROE (RETURN OF EQUITY)

(maximum 1200 words)

Answer 1

ROA (Return of Assets) = Net Income / (Avg Total Assets)

In case of Infosys, in FY 16-17, ROA = 2140 / ((12854+11378)/2) = 17.66%

as compared to FY 15-16, ROA = 2052 / ((11378+10615)/2) = 18.66%

As can be seen, despite the fact that the net profit has risen, there is a fall in ROA. This indicates that there is an increase in total assets of the company without having an equivalent increase in Net Profit.

ROA indicates the return generation capacity of the company in comparison to the total assets of the company.

ROE (Return of Equity) = Net Profit / (Avg Shareholders Equity)

In case of Infosys, in FY 16-17, ROE = 2140 / ((10637+9324)/2) = 17.66%

as compared to FY 15-16, ROA = 2052 / ((9324+8762)/2) = 22.69%

As can be seen, despite the fact that the net profit has risen, there is a fall in ROE. A fall in ROE is a serious trigger point. It indicates that the company is not performing like it was previously.

ROE indicates the actual return the company has given to the Shareholder on his invested capital in a particular year. It is also correlative with Return on Capital for the Shareholder.