Return on assets will generally equal return on common equity except when the company has no long-term debt.

Question

Quizplus · Accepted Answer

Return on assets (ROA) and return on common equity (ROE) are two different financial performance ratios. ROA measures how efficiently a company is generating profits from its assets, while ROE measures the profitability of a company's equity financing. While there may be some correlation between the two ratios, they are not always equal. One key factor that can affect the difference between ROA and ROE is a company's use of debt. If a company has long-term debt, ROE will generally be higher than ROA because debt financing increases the return on equity through leverage. However, if a company has no long-term debt, the two ratios may be closer to one another.

Return on Assets Will Generally Equal Return on Common Equity