Question

Explain why a firm's ROI will always be greater than ROA:

A. ROI considers only equity, while ROA considers both debt and equity.
B. ROA includes interest expense, while ROI does not.
C. ROI is a subset of ROA and, by definition, is always higher.
D. ROI is not influenced by the firm's assets.

Answer 1

The correct answer is B. ROA includes interest expense, while ROI does not.

Step-by-step explanation:

The correct answer is B. ROA includes interest expense, while ROI does not.

ROI (Return on Investment) is a profitability ratio that measures the return generated on an investment relative to the cost of that investment. It is calculated by dividing the net income of a business by the cost of the investment.

ROA (Return on Assets), on the other hand, measures a company's efficiency in utilizing its assets to generate profit. It is calculated by dividing the net income of a business by its total assets.

Since ROA includes interest expense, which is an additional cost for the company, it will always yield a lower return compared to ROI, which does not take interest expense into account.