A clear distinction between return on assets and return on equity is that return on assets:
A) must always be a smaller percentage than is return on equity.
B) is a measure of management's investment decisions that excludes any consideration of how the investments were financed.
C) is of greater interest to investors than is return on equity.
D) measures operating leverage while return on equity measures financial leverage.

Question

Quizplus · Accepted Answer

Return on assets measures how effectively a company is utilizing its assets to generate profits. It is a measure of profitability that excludes any consideration of how the investments were financed. Return on equity, on the other hand, measures how effectively a company is utilizing shareholder equity to generate profits. It takes into consideration the financing decisions of the company and is therefore affected by the use of financial leverage. Therefore, option B is the correct answer.

A Clear Distinction Between Return on Assets and Return on Equity