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

Question

Quizplus · Accepted Answer

Return on equity (ROE) measures the return on the shareholders' investment and is calculated by dividing net income by shareholders' equity. As debt is a cheaper source of financing than equity due to the tax benefits, if a company uses more debt, its cost of capital decreases, leading to a higher return on equity. On the other hand, return on assets (ROA) measures the return on the company's investment in total assets, and it is not influenced by the capital structure.

Return on Equity Will Be Higher Than Return on Assets