Question

Analyze ROA and ROE and how each one fits into Profitability Ratios.

Answer 1

ROA is the return on Assets and ROE is return on equity.

Both of these are profitability indicator of a company and shows the financial health of a company.

As both of these are profitability indicators they can be called as profitability ratio, Lets understand this by there formulaes:-

• ROA = Net Income/Average Total Assets
• ROE = Net Income/Sharehoders Equity

So in simple terms we can say this:-

• "ROA is a profitability ratio that depicts the return generated by the company from be asssets invested in the entity."
• "ROE is aprofitability ratio that depicts the return generated by the company from its shareholders investment in the company.

Both these ratio can be used to find out the true profitability of the company and the the financial wealth of the compnay.