Question

The following table contains financial statement information for Izzy Corporation. ($ millions) Total Assets Net Income Sales Equity 2016 $105,000 $10,000 $95,000 $30,000 2017 $125,000 $11,000 $100,000 $31,000 Compute the return on equity (ROE) and return on assets (ROA) for 2017.

Answer 1

The ROE for 2017 is 35.48% while the ROA for 2017 is 9.565%

Explanation:

The return on equity (ROE) is the return the company earns over the shareholders equity. It is a profitability measure in relation to a business's equity. The formula for ROE is,

ROE = Net Income / Shareholder's Equity

The return on assets, on the other hand, is the return earned by a company over the total assets employed. It is a profitability measure in relation to the total assets of a business. The formula for ROA is,

ROA = Net Income / Average Total assets

Where,

Average total assets = (Total assets at start + Total assets at end) / 2

For 2017:

ROE = 11000 / 31000 = 0.3548 or 35.48%

Average total assets = (105000 + 125000) / 2 = $115000

ROA = 11000 / 115000 = 0.09565 or 9.565%