What Is the Difference Between Return on Assets and Return on Equity?

Return on assets, also called return on assets, is an indicator used to measure how much net profit is created per unit of assets. The calculation formula is: return on assets = net profit / average total assets * 100%. The return on assets is one of the most widely used indicators to measure the profitability of banks in the industry. The higher the indicator, the better the effect of corporate asset utilization.

Return on Assets

Return on assets, also known as return on assets, is a measure of how much assets are created per unit

In actual financial work, due to different working angles and starting points, the return rate can have the following types:

1. Actual yield

The actual rate of return represents the realized or determined rate of return on assets, including the sum of the realized or determined rate of dividends (shares) and the rate of return on capital gains.

2. Nominal rate of return

The nominal rate of return refers only to the rate of return stated on the asset contract. For example, the borrowing rate on a loan agreement.

3. Expected rate of return

4. Necessary rate of return

Necessary rate of return is also called "minimum required rate of return" or "minimum required rate of return", which means the minimum rate of return that investors reasonably require for an asset.

Expected rate of return the necessary rate of return required by the investor, the investment is feasible;

Expected rate of return <necessary return required by investors, investment is not feasible.

5.Risk-free rate of return

The risk-free rate of return is also known as the risk-free rate of interest. It refers to the rate of return of a known and risk-free asset. Its size consists of a pure interest rate (the time value of funds) and an inflation subsidy.

In general, for convenience, the interest rate of short-term Treasury bills is generally used instead of the risk-free rate of return.

6.Risk return ratio

The risk-return ratio refers to the additional income required by an asset holder to bear the risk of the asset in excess of the risk-free interest rate. It is equal to the difference between the necessary return and the risk-free return. The risk-return ratio measures the "extra compensation" required by investors to transfer funds from risk-free assets to risky assets. Its size depends on the following two factors: first, the size of the risk; and second, the investor's preference for risk .

Necessary rate of return = risk-free rate of return + risk rate of return

Risk-return ratio = Necessary rate of return-Risk-free rate of return

The role and limitation of return on assets:

The relationship and difference between return on assets and return on equity:

Many people equate ROE with ROA, but they are actually different.

Return on equity (ROE) is the after-tax earnings per share divided by the book value of shareholders' equity per share, or the company's total after-tax income (EAT) divided by the company's total shareholder equity book value (EQ) ;

The return on assets (ROA) is the ratio of the company's total after-tax income (plus interest) to the company's total assets. The relationship between the return on equity and the return on assets is:

Return on equity (ROE) = return on assets (ROA) × leverage ratio (L)

Among them: the leverage ratio is the ratio of the company's total assets to the company's total shareholder equity book value (Leverage Ratio, referred to as L)