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The return on assets for Ayala Corporation is 7.6%. During the same year, Ayala’s return on...

The return on assets for Ayala Corporation is 7.6%. During the same year, Ayala’s return on common stockholders’ equity is 12.8%. What is the explanation for the difference in the two rates?

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Answer #1

Return on assets = net income / average total assets.

Return on equity = net income / average share holder's equity.

assets = share holder's equity + ;liabilities

Since return on assets and return on equity use the same numerator, but the denominator in case of return on assets i.e assets is an amount which is greater than that in case of return on equity i.e shareholder's equity (which is assets - liabilities) the return on assets is greater than return on equity.

In case the company doesn't use any debt, then the liabilities will be zero which will make the return on assets equal to return on stock holder's equity.

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