When Roe Is Higher Than Roa?
In the Absence of Debt, Shareholder Equity and the Company's Total Assets Will Be Equal. Logically, Its Roe and Roa Would Also Be the Same. but If That Company...
In the absence of debt, shareholder equity and the company's total assets will be equal. Logically, its ROE and ROA would also be the same. But if that company takes on financial leverage, its ROE would be higher than its ROA. By taking on debt, a company increases its assets thanks to the cash that comes in.
Should ROE be greater than ROA?
The ratio is, after all, a measure of asset productivity (which would in- clude both owner's equity and debt capital). This adding back in of interest produces an in- teresting result when comparing ROA to ROE. ROE should be greater than ROA.
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What if ROE is too high?
The higher the ROE, the better. But a higher ROE does not necessarily mean better financial performance of the company. As shown above, in the DuPont formula, the higher ROE can be the result of high financial leverage, but too high financial leverage is dangerous for a company's solvency.
James Sterling reports on renewable energy developments, climate policy, ecological conservation, and green tech innovations around the globe.
