The extent to which a company uses its liabilities to leverage up its return to stockholders is measured by the difference between ROE and ROA.

Question

Quizplus · Accepted Answer

The difference between Return on Equity (ROE) and Return on Assets (ROA) essentially measures the extent to which a company uses financial leverage. ROE reflects the profitability of a company from the shareholders' perspective, considering both equity and debt financing, while ROA focuses on the company's efficiency in using its assets, regardless of financing structure. The difference between these two ratios can indicate how much a company's financial leverage is amplifying returns to shareholders.

The Extent to Which a Company Uses Its Liabilities to Leverage