Return on equity will be higher than return on assets if there is debt in the capital structure.

Question

Quizplus · Accepted Answer

Return on equity (ROE) is calculated as net income divided by shareholders' equity, while return on assets (ROA) is calculated as net income divided by total assets. If debt is included in the capital structure, the amount of shareholders' equity will be relatively lower, which would result in a higher ROE. This is because the company is using borrowed funds to increase profits, which translates to a higher return for the shareholders compared to what they would have earned without using debt.

Return on Equity Will Be Higher Than Return on Assets